Paycheck Chronicles

Keep An Eye On Your Taxes All Year


Yesterday was the extended filing date for 2014 federal income tax returns, and lots of people (including me) have just finished dealing with our 2014 federal income tax returns.  Plus, it is just a few short months until the 2015 federal income tax filing season starts!

Today, I read a Facebook comment from a frustrated friend who had also just finished up her 2014 taxes, and she was faced with a large bill that was a surprise.  A number of things jumped out at me as being "not quite right" about her situation.  Sometimes I forget that everyone isn't weirdly interested in taxes.

Even if you are not a tax person, there are some easy steps you can take to make sure that you don't end up with tax return surprises:

Understand How Taxes Work

This is the single most important piece of advice I can give to anyone:  have at least a basic understanding of how income taxes work.  You don't have to understand every nuance of every little strange regulation.  If your tax situation is that complicated (mine is), you need to have a good accountant who can worry about the little bits.  However, you need to be able to run down your basic 1040 form and have some general idea what each line means.  If you don't, do some internet research, pay for an hour of a professional's time, or ask me questions!

Estimate Ahead of Time

The first step in not having tax surprises is to estimate your taxes at the beginning of the tax year.  Yes, I mean that you should sit down in December 2015 or January 2016 to estimate the 2016 taxes that you'll be filing in early 2017.  This shouldn't be too hard, since most people's income tax situation doesn't change entirely from year to year.

Plan Ahead

In my situation, I use the previous year's figures and make adjustments that I know will happen.  For example, at the beginning of 2015, I plugged in our 2014 figures (income, tax withheld, etc.).  I then adjusted for the fact that my husband was going to get a raise mid-year.  Other changes you might be able to anticipate include having a child (or having a child grow up!), having a military member in a tax-exempt combat zone, moving into or out of a house that you own, or a spouse starting or stopping working.  This isn't super-fancy, just a quick and dirty estimate of what your total tax liability will be at the end of the year.

Then, over the course of the year, keep an eye on how things have changed and how much you are currently withholding.  Maybe the spouse didn't get a job after all, or kept working even though you thought he or she was going to stop.  Maybe the PCS move didn't happen, or you bought when you thought you would be renting.  Maybe a small business suddenly started earning significantly more money, or maybe a rental house needed a new roof.  Make little adjustments to your estimated tax return to account for the information you have, and compare your current withholding to new estimates.

Then, look at the amount you've withheld from your income so far during the year.  If necessary, increase or decrease your withholding to get the yearly total close to your estimate.  I always try to withhold just a little bit more than I think I'll need.

When The Year Ends

If all goes well, you'll finish out the tax year, prepare your income tax returns, and discover that you've done a pretty good job of estimating correctly.  This isn't a perfect science.  The closest we've ever managed, even with careful watching, is to be within $50 of our actual tax bill.  Other years, we've under-withheld or over-withheld by hundreds or even thousands, almost always due to surprises related to my income or one of our rental properties.  Use that information to help with your estimation for the next year's taxes.

The most important things are to understand how taxes work and to not wait until the end of the year to see how you're doing, tax-wise.  Just a few minutes throughout the year will make it easier to calculate the actual tax return and increase the chances that you're having the right amount withheld.

Happy Math!

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