Now that we’re in the second month of the New Year, I hope you’re still keeping up with your resolutions, whether they were for dieting, exercising, quitting bad habits or starting good ones.
How many of you made a vow to be better prepared for your taxes?
Few of us think of taxes while setting our resolutions in January, but that doesn’t mean you still don’t have time to set some goals for the 2019 tax year.
By proactively planning now, you can help set yourself up for an easier time come next year’s tax season. Here are some basics that can help you as you set and keep your 2019 tax goals:
Know your brackets
Do you know which tax brackets apply to your income? There are currently seven federal tax brackets. One or all of the brackets may apply to your income, depending on how much you make. As you make more money, more of your income will be taxed in increasingly higher brackets.
This can be important to know, especially if your income begins to reach the minimum amount for the next bracket. For instance, if you’re single and earn $45,000 a year, all the income above $39,475 would fall into the 22 percent bracket.
Knowing this, you could set yourself up to have money taken out pre-tax for your company’s 401(k). In this example, your last $5,525 would not need to be taxed at the higher 22 percent rate.
It is a win-win for you as you avoid paying that higher marginal rate on those last dollars, and you save money for retirement.
To learn more about brackets, see blog.taxact.com/how-tax-brackets-work.
Adjust your withholding
Every employee fills out IRS Form W-4 to let their employer know how much tax to withhold from each paycheck. How you fill this form out can play a big role in how much you owe the IRS when you file.
Withhold too little and you might owe when you file your tax return in April. Withhold too much and you might get a refund, but live on less of your paycheck.
Have you been receiving large tax refunds? Getting a nice-sized check from the government may seem like a boon, but it can actually be a sign you’re withholding too much.
Getting a refund means you’ve loaned the government money and now it’s paying it back. The solution can be to adjust your withholding so you can have less taken out of your paycheck for taxes, which means you’ll get more take-home pay to use or invest as you choose.
Look for deductions, credits
A tax deduction is a dollar amount you can subtract from your taxable income. The lower your taxable income, the lower your tax bill.
Tax credits are even better and provide a dollar-for-dollar reduction in your actual tax bill. Some credits are even refundable, which means that if you owe $1,250 in taxes, but qualify for a $1,000 credit, your tax bill could be reduced to $250.
Knowing the difference can help you decide on purchases you make throughout the year. If you’ve been thinking about buying an electric car or installing solar panels on your house, you can receive some fairly significant tax credits and reduce your tax bill substantially.
Make quarterly payments
If you’re self-employed, working as a freelancer or own a business, it’s important to understand your tax-filing options at the beginning of the year. Since taxes aren’t automatically deducted, take-home pay for the self-employed tends to be a bit higher than for wage earners throughout the year.
It might be tempting to consider all that money yours. This can be a big oversight, however, as you’ll eventually have to pay taxes on the money. Making quarterly estimated tax payments can help you avoid a big tax bill come April.
If you don’t feel comfortable making tax decisions for yourself, it may be beneficial to hire a professional until you do. If you own a business, it’s especially important to do your taxes right the first time.
Skip Johnson is an advisor and partner at Great Waters Financial, a local financial-planning firm and insurance agency. Johnson appears regularly on Fox 9’s morning news show. Learn more at greatwatersfinancial.com.