Summer to-do list should include a tax checkup
Even though it may feel like the tax deadline was not that long ago, now is a good time for taxpayers to revisit, or look at for the first time, their 2015 taxes. Especially for those who owed a big sum to the government last year, there is plenty of time to reverse that trend for 2015. By reviewing the past six months and making tax plans for the next six, taxpayers can make sure they are on track for the April 2016 that they want.
1. Update tax information with an employer
Updating the W-4, which a taxpayer provides their employer when hired, is important because it determines how much federal income tax is withheld from every paycheck based on the number of allowances selected and marital status. The optimum number of allowances can change with common life events like births, weddings, graduations and home purchases or sales. However, an estimated two in five taxpayers don’t update their W-4 when they experience major life changes, which can lead to a surprise next April.
Updating the W-4 may be beneficial even if a taxpayer did not experience a major life change. For example, taxpayers who got a big tax refund this year and would rather get more money throughout the year may benefit from changing the information on their W-4.
Online tax calculators can help taxpayers figure out how best to adjust their W-4.
2. Update information with a health insurance marketplace
Taxpayers who have health insurance through a state or federal marketplace may qualify for the Advance Premium Tax Credit (APTC) to help make their premiums more affordable. The tax credit, based on estimated household income and family size at the time of enrollment, is paid directly to the health insurance provider throughout the year. That means the taxpayer has to settle up at the end of the year on their tax return, calculating if too much or too little of this tax credit went toward their premiums. In 2014, about two-thirds of taxpayers who received the APTC had to pay back an average of $729.
In order to avoid getting too much or too little APTC, taxpayers should notify their state or federal marketplace immediately of any changes to their household or income or family configuration. The sooner they notify the marketplace, the better chance they have at minimizing the impact in April.
3. Track possible deductions and credits
Deductions reduce tax liability, but are usually based on expenses paid or other actions taken before the tax year ends. Taxpayers who plan ahead can maximize their deductions by making charitable donations, investing in qualifying retirement accounts or paying extra on student loan debt. Tax credits reduce the taxpayer’s actual tax bill. Some credits, such as higher education credits and the dependent care credit, are also usually based on expenses paid during the year. Taxpayers should keep good records of their donations and other expenses they plan to deduct or use to qualify for a credit, both to make the tax filing process easier and to be prepared in the case of an audit.
4. Estimate income
Estimating income can be one of the most difficult parts of tax planning for the self-employed, small business owners and taxpayers with health insurance through a federal or state marketplace. Correctly estimating or projecting their 2015 income at the start of the year – or even as early last November if they enrolled in Marketplace coverage – can prevent taxpayers from facing underpayment penalties or getting too large an APTC. These taxpayers should review their initial estimates for accuracy and adjust them as necessary to diminish any negative impact.
This quick summer to-do list could not only make next tax season run smoothly, but it could even help taxpayers minimize their tax bill or maximize a refund. Even though tax season is months away, there is no reason to wait to save money.