Last month I hinted at not owing taxes at the end of the year. The first way, and this should be obvious, is adjust your withholding amounts to avoid owing in the future. Generally, a mid-year review with your most recent pay stub(s), or most recent earnings and expenses if you are self- employed, will help determine what you should have paid in for the year. You can adjust your withholdings through your HR department or make estimated payments to meet your withholding needs.
One really simple method is to take your tax return, look at how much you paid in taxes for the previous year and divide that amount by the number of paychecks you will receive for the current year. For example, if your total tax (line 63 from your 2017 form 1040) was $1,000, you will need to have $19.23 per paycheck withheld if you are paid every week, $38.46 every two weeks, $41.67 if you are paid twice per month, etc. You will have to keep some things in mind if your tax obligation included any kind of credit, an above the line deduction or itemized deductions or if you got a new job, another job or a raise. In fact, the best time to have this conversation is when these or other life changes happen.
If you aren’t having an amount withheld that allows you to break even, talk to your tax professional. You could talk to your HR department, but they are usually taught to refer you to a tax professional (they are HR professionals, not tax professionals) so you might as well skip the middle man. If you’re self-employed, that HR department is going to be you.
If you don’t feel like messing around with adjusting your withholdings, your tax professional can provide you with preprinted vouchers based upon the results of your return. Anyone can, if they wish, pay in estimated taxes by enrolling in the Electronic Federal Tax Payment System at eftps.gov. It’s fairly easy to sign up and payments can come directly from your bank account.
This might be a good time to do a quick check; is everyone still with me? Good. Sometimes the topic of taxes can get a bit dry or boring and that’s where it could cost you money. Just this part of the conversation could last an hour and we only hit the highlights in just the time it took to read a few sentences.
Back on topic, once you have determined if your prior year tax obligation will be covered, there are a few things that can be done to decrease your taxable income in the future, not just meeting the obligation from last year. They do “cost” a little spendable income, but you should see it more as an investment in yourself. First, if your employer offers a retirement plan of any kind, contribute to it. A 401(k), if you are in the private sector and your employer offers it, will do two things for you: it will reduce your taxable income and give you an employer match of some kind. Contributions are limited to a maximum of $18,000 for 2017.
Public employees may have the option to contribute to a 403(b) plan. Often, there is no employer match, but the contribution does reduce your taxable income. If your employer doesn’t have a plan available, you may want to look into the Individual Retirement Account. IRAs have two different forms, the Traditional, or deductible, IRA and the ROTH, or non-deductible IRA. They both have benefits and drawbacks, which can take an article all on their own. There are a number of other plans that may or may not be available, depending upon your employer. The IRS has posted updated amounts and limitations at irs.gov/pub/irs-drop/n-16-62.pdf.
If you find yourself needing to review your withholdings or your other options to reduce your taxable income, call our office today to schedule a free consultation with one of our Enrolled Agent professionals. FBN
Patrick Fleming, EA, is a partner in Northern AZ Financial Services Co. For more information, visit northerazfinancial.com or call 928-526-3999.