Even though only a few months remain in 2014, you still have time to act so you aren’t surprised at tax-time next year. You should take steps now to avoid owing more taxes or getting a larger refund than you expect. Here are some actions you can take to bring the taxes you pay in advance closer to what you’ll owe when you file your tax return:
Adjust your withholding.
If you’re an employee and you think that your tax withholding will fall short of your total 2014 tax liability, you may be able to avoid an unexpected tax bill by increasing your withholding.
If you are having too much tax withheld, you may get a larger refund than you expect, which is essentially an interest-free loan to the US government. While many people like getting a large refund, consider adjusting your withholding to just cover your tax bill, and use the extra cash each paycheck to invest and earn some interest.
In either case, you can complete a new Form W-4, Employee’s Withholding Allowance Certificate and give it to your employer. Enter the added amount you want withheld from each paycheck until the end of the year on Line 6 of the W-4 form. You usually can have less tax withheld by increasing your withholding allowances on line 5. Use the IRS Withholding Calculator tool on IRS.gov to help you fill out the form.
Report changes in circumstances.
If you purchase health insurance coverage through the Health Insurance Marketplace, you may receive advance payments of the premium tax credit in 2014. It is important that you report changes in circumstances to your Marketplace so you get the proper type and amount of premium assistance.
Some of the changes that you should report include changes in your income, employment, or family size. Advance credit payments help you pay for the insurance you buy through the Marketplace. Reporting changes will help you avoid getting too much or too little premium assistance in advance. Receiving assistance in excess could mean having to pay it back when you file your taxes.
Pay estimated tax if required.
If you get income that’s not subject to withholding you may need to pay estimated tax. This may include income such as self-employment, contract work, interest, or rent. If you expect to owe a thousand dollars or more in tax, and meet other conditions, you may need to pay this tax.
You normally pay the tax four times a year. Your CPA may provide you with estimated tax vouchers to use throughout the year (Form 1040ES). You also have the option of paying estimated taxes online through EFTPS on the IRS website (click the Payments tab).
If you do not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
Donate to charity.
While our philosophy tends to err on the side of “why spend a dollar to save a nickel?”, if you usually donate to charity and perhaps you received a big promotion or bonus, why not consider bumping your charitable contributions? As always, be sure to keep your receipts. Also, keep in mind this strategy is only a tax advantage if your deductions warrant itemizing versus the standard deduction.
Still have questions about how you can manage your tax liability throughout the year? Feel free to contact us to schedule an appointment with your local Dallas CPA.
