Most taxpayers get a refund when they file their annual tax return, but that’s not true for everyone. Some taxpayers have a balance due to the IRS at tax time because they don’t have enough withheld from their paychecks, earned more than usual, or their tax situation changed and they no longer qualify for the same tax breaks they did in the past. The good news is with some proper planning you can avoid owing money next year.
Adjust your withholding
One of the easiest ways to avoid a tax time surprise is to check your tax withholding annually. Using the IRS withholding calculator will show you whether you’re on track to get a tax bill or a refund. It can also show you what adjustments must be made so you have the appropriate amount of taxes deducted from your paycheck. If you need to update your withholding, download Form W-4 from the IRS website, fill in the recommended changes and submit the form to your employer.
Pay estimated taxes if you’re self-employed
Depending on what you do for a living, you may have to make quarterly estimated tax payments. Typically, this applies to individuals who are self-employed, freelancers, and contractors because taxes aren’t automatically withheld from their pay. If you expect to owe more than $1,000 in taxes when you file your annual return, you’ll need to pay estimated taxes. The payments are due June 15th, September 15th, and next year January 17th.
Saving for retirement can reduce your taxable income
Saving for retirement can help you save money on your taxes and set you up to live comfortably in your golden years. You can open a traditional IRA, which will allow you to set aside up to $6,000 ($7,000 if you’re aged 50 or older). However, if you’re looking to save more money, contributing to your employer’s 401k plan may be a better option. For 2022, you can contribute up to $20,500 to a 401k. Those in the 50 and up club can contribute an additional $6,500 to their retirement account. Aim to save as much as you can because every dollar you contribute lowers your taxable income, so you pay less income tax.
Be aware that unemployment benefits are taxable
It’s not uncommon for people to collect unemployment benefits to help stay afloat in-between jobs. However, many people don’t realize that it’s considered taxable income. If you don’t have any taxes withheld (or too little), you may wind up with a tax bill or smaller refund than anticipated. To avoid any surprises, it’s a good idea to complete Form W-4V, Voluntary Withholding Request so the government withholds taxes from each check.
Hold on to valuable receipts
When you do your taxes, you have the option of itemizing or taking the standard deduction. For 2022, the standard deduction is $12,950 for single or married filing separately, $19,400 for head of household and $25,900 for married couples filing jointly. If your allowable expenses exceed that amount, then it makes more sense to itemize. The IRS allows you to deduct unreimbursed medical and dental expenses, mortgage interest, charitable contributions, gambling losses, etc. So, holding on to the right receipts can save you money.
Take advantage of every legal tax break
Using tax software to do your taxes minimizes mistakes and can help you tax advantage of tax breaks you didn’t even know existed. Ensure you get every dollar you deserve by using ezTaxReturn to do your taxes. It’s fast, easy and you’ll get the biggest possible refund, guaranteed. Pre-register now to save time and money when you file with us next year.