Updated for tax year 2018.
Writing a check to the IRS to cover your tax bill is never a fun experience. But, there are a few things you can do to avoid doing that in the future.
Check out these tips to lower next year’s tax bill now.
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 qualify for any missed tax breaks this year.
Tax planning doesn’t have to mean fancy accountants or tricky financial maneuvers. It can be as simple as holding onto capital assets that increase in value until they qualify as long-term capital gains. Or it can mean making sure your sale of a residence meets the requirements for excluding any capital gain on your tax return.
Maximize deductible retirement contributions
You can dramatically lower your tax bill by making deductible retirement contributions. Traditional IRAs are a good start, but they also have lower 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. Nondeductible contributions to retirement plans such as Roth IRAs are another option.
Of course, 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 now, gather your pay stubs with year-to-date amounts and other information. Use TaxAct’s Tax Calculator to estimate your refund so you can determine if you need to make any adjustments before Dec. 31.
Increase your income tax withholding
Many life events spark a need to change your income tax withholding. However, before you run off and do so, make sure it’s actually warranted.
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. Assess your financial situation this year to determine your best course of action.
Reducing your withholding allowances means you’ll have more income tax withheld. That’s great if you plan to report a chunk of money that didn’t originally have taxes withheld when you received it. However, on the flip side, increasing your withholding will decrease the amount of tax withheld. If you paid too much last year and your financial situation is relatively the same this year, you may want to consider adjusting the amount of tax withheld from your remaining paychecks. You might be surprised how one additional allowance will change your take-home pay.
In addition, you can adjust your withholding by entering a flat amount of additional tax you want your employer to withhold. That can help cover an additional tax you may owe.
Whenever your financial situation or your estimates change, you can always file a new Form W-4 with your employer. Simply submit it to your employer’s payroll department. Do not send a copy to the IRS.
Make estimated tax payments to reduce your tax bill
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. But, even if you missed the last deadline in 2018, don’t worry. You can make tax payments at any time to catch up.
For example, say you sell an investment and make a sizeable profit in October. You can wait and pay any capital gains tax by the next estimated tax due date of January 15. Or you can wait until you file your tax return. However, by that time it may be harder to come up with the cash to pay your tax bill. In that case, you can choose to estimate your tax send it to the IRS now.