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Owe Taxes This Year? Here Are 5 Ways to Lower Next Year’s Tax Bill

Owe Taxes This Year? Here Are 5 Ways to Lower Next Year’s Tax Bill - TaxAct Blog

You’ve finished your taxes. You may have expected a refund, or maybe you knew you’d have taxes to pay when you filed your return.

Either way, writing more than a small check to the Internal Revenue Service is an experience you’d rather not repeat.

What can you do to avoid it in the future?

Check out these tips to lower next year’s tax bill:

Focus on better tax planning

When it comes to taxes, planning ahead is always better than waiting until December 31.

Last year’s tax return is the first place to look when you start planning for a new tax year.

See if there are ways you could have planned better, or if you may qualify for tax breaks in the future.

Tax planning doesn’t have to mean fancy accountants or tricky financial maneuvers.

It can be as simple as holding capital assets that have increased in value until they qualify as long-term capital gains, or making sure your sale of a residence meets the requirements for excluding any gain.

Maximize deductible retirement contributions

You may be able to dramatically lower your tax bill by making deductible retirement contributions.

Traditional IRAs are a good start, but they have fairly low annual contribution limits. You may qualify for other retirement plans that allow you to make much more significant contributions – and lower your tax bill at the same time.

Of course, nondeductible contributions to retirement plans such as Roth IRAs are another option.

However, the best retirement plan is the one to which you actually contribute. If getting a tax deduction now helps motivate you, that’s not a bad thing.

Consider quarterly checkups

It’s a good idea to look at your tax situation more than once a year. Even with a predictable income, things change over time. Four checkups a year is ideal for many people.

To see how you’re doing during the tax year, gather your pay stubs with year-to-date amounts and other information.

You can use TaxAct’s Tax Calculator to estimate your refund.

Increase your income tax withholding

Before you change your income tax withholding, be sure you actually need to.

If you had a taxable windfall last year, such as a few profitable stock trades or temporary extra income, you may be fine for this year. Don’t rush to overpay this year, just because you had to pay last year.

If you’re an employee, it’s easy to increase your income tax withholding. Simply file a new Form W-4 (Do not send it to the IRS.)

One thing you can do is reduce your withholding allowances — fewer withholding allowances generally result in having more income tax withheld.

You can use the easy Form W-4 Withholding tool in TaxAct (sign in and click on the “Next Year” tab) to determine how one additional allowance will change your take-home pay.

You can also have more withheld by checking the “Married, but withhold at higher single rate.”

In addition, you can adjust your withholding by entering a flat amount of additional tax you want your employer to withhold.

Whenever your financial situation or your estimates change, you can always file a new Form W-4 with your employer.

Make estimated tax payments

Another way to avoid a big tax bill at the end of the year is to make estimated tax payments during the year. If you elect this option, keep in mind that tax payments are due four times per year.

However, you can always make tax payments at any time.

For example, say you sell an investment and make a sizeable profit in October. You can wait and pay any capital gains tax by January 15, or even when your file your tax return, depending on your situation.

However, by that time it may be harder to come up with the cash to pay your tax bill.

Nothing’s stopping you from estimating your tax on a significant windfall when you get it, and either placing the money in a special tax account or sending it to the IRS immediately.

TaxAct makes preparing and filing your taxes quick, easy and affordable so you get your maximum refund. It’s the best deal in tax. Start free now or sign into your TaxAct Account.
About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at CreditCards.com, Bankrate.com, Interest.com, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

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