Five Fixes For Next Year’s Taxes
Whether you got a large tax refund this year, or you owed money to the government, there are things you can do now to change next year’s return.
Here are five things you can do to change next year’s taxes:
1. Change your withholding
If you found yourself owing money to the government this year, you may need to change your withholding. Perhaps you are claiming too many exemptions, in which case you may have to decrease that number. The amount listed on your regular paycheck will decrease, but you won’t have an unpleasant shock when it comes time to file.
If you have the opposite problem, you’re probably having too much withheld from your salary. Having a large return can be fun, but it also means that you loaned the government your money interest-free for a whole year. If you use your refund for paying off debt or taking a vacation, set up an automatic transfer instead so you won’t spend your entire salary.
For both problems, use the IRS Withholding Calculator to check how much you need to claim to get as close to a zero dollar return as possible.
2. Contribute more to a pre-tax plan
If you want to decrease your taxable income, contributing to a traditional IRA or 401k can be a great way to increase your savings and to pay less in taxes.
The maximum amount you can contribute to a 401k in 2015 is $18,000 per person. Check to make sure you qualify to contribute to these types of accounts.
For an IRA, you can contribute up to $5,000 and can make those contributions for the previous year up to the tax filing due date. For example, if you forgot to contribute to an IRA for 2015, you would have until April 15, 2016, to make contributions for 2015 and claim them on your taxes. For those 50 and older, you can contribute up to $6,500 a year.
3. Take out a percentage from your side income
Freelance work can be a great way to supplement your income, but not if you end up owing taxes unexpectedly at the end of the year. If you’re going to receive a 1099, make sure to save 20-30% of whatever you earn.
You should also keep track of any expenses you can deduct. If you work from home, see if you can deduct part of your rent and utilities as an expense. Put some money aside in a
separate account so you can be prepared to pay your tax bill without digging into your savings.
4. Keep track of all charitable expenses
If you itemize your deductions, keep a running list of any contributions you make to charity. All those donations to Goodwill, your kid’s school, and the Salvation Army can add up and make a substantial difference.
Get a receipt any time you make a donation and use a spreadsheet to see how much you’ve given throughout the year. If your budget is tight, doing this might even help you realize that maybe volunteering is a better way you can give back.
5. Calculate your healthcare costs
For those who itemize, keep track of how much you pay in healthcare-related costs. If you pay more than 10% of your adjusted gross income (or 7.5% for married couples), you may be able to deduct a portion of that amount. Go to the IRS website to see what qualifies as medical expenses.
This requires keeping doctor’s bills and staying organized to make sure you have proof of that deduction. But for those who get sick often or have a high-deductible, this deduction can be a godsend.
Too many people assume that whether or not they get a refund depends on the government. I’ve had coworkers get excited about their $400 refunds and immediately take them and go shopping. Others have complained about the IRS and how it’s unfair that the government takes their money. Knowing how you can change your tax return, and having some control over it, can be empowering.
It’s also important to recognize how changing your status will affect your taxes. Get married or divorced, claiming dependents, moving to a different state — all of these can have a very real effect. By being involved in your tax situation, you’ll be able to spot problems before your return is due.
Zina Kumok writes about paying off $28,000 worth of student loans in three years at Debt Free After Three. She has been featured in DailyWorth, LifeHacker and Time. Follow her on Twitter and Facebook to get more advice on budgeting, saving and paying off debt.