Few taxpayers want to invest more time and thought into taxes than they have to, but putting taxes on “auto pilot” isn’t the way to realize the financial benefit you could potentially gain with a simple tax strategy. Here are four simple mid year tax checks you can easily complete in an afternoon that will make the most of your money and time when tax season approaches.
File your 2014 return if you filed an extension. While you still have time to complete your 2014 tax return mid-year if you filed for an extension, now’s the time to finish it. Not only will completing your tax extension early ensure that you won’t have to play beat the clock as October 15th, nears, filing early means you can better manage the costs of interest and penalties that will be considered retroactive (back to April) if your return indicates that you owe additional tax. (Though there are some fees involved, the IRS will allow you to pay in installments if you don’t have the cash on hand).
If your tax filing indicates that you’re owed a refund, filing early works to your financial advantage, too. The earlier you get your refund, the sooner you can put it to work, whether to pay down debt, build an emergency savings funds, contribute to your child’s college education, beef up retirement contributions, make home improvements, or take advantage of investment opportunities in the market.
Check and/or change your withholding rate. Did you receive a tax refund when you filed this year? Did you get married or divorced, change jobs, start a business, rent a property, or send a child to college? All of these life events can potentially have bearing on your taxes; adjust your withholding rate now to ensure you’re not overpaying, or underpaying—both of which can cost you money at tax time that you can avoid with a little planning.
To estimate the correct withholding amount, sit down with a copy of your most recent paystub, and last year’s tax return. Access the IRS’ free online withholding calculator to estimate how much you’ve paid so far in taxes, compared to how much you’ll ultimately owe for the current tax year. If you’ve withheld more than your share, submit a withholding change to your employers’ human resource department so you don’t continue to have more than necessary taken out of your paycheck. If your analysis concludes that you haven’t paid enough up to this point to cover the amount of taxes you’ll owe, increase your withholding, and create a savings plan so you don’t have to put your taxes on a credit card, or use an installment plan come April.
Organize your tax information. Use midyear as an opportunity to get your tax materials organized. If you don’t have a relationship with a tax professional and want one, use this time of year to find an accountant or bookkeeper—before the madness of tax filing season is underway.
If you hand paper files off to your accountant or bookkeeper, organize them by expense category, or month in a simple accordion file or a fireproof file cabinet. If you enter your expenses into a spread sheet or bookkeeping software, get caught up on data entry so the information is current from the start of the year through mid-year. Not only will it make your life easier for your annual tax filing, it could shave money off your accounting fees. Data compiled by the National Society of Accountants revealed that tax preparers charge, on average, about $115 for disorganized files.
Check in with your retirement contributions. At mid-year, you’ll have a sense for how you’re doing financially, what expenses to anticipate, and how much (more) you can afford to invest in a retirement account through the rest of the year.
Maximizing your retirement contributions isn’t just about investing in your future; it reduces your taxable income. Though your budget may not allow you to invest thousands of dollars into your retirement plan in December, checking in mid-year empowers you to adjust your spending in order to contribute some additional amount—even if it’s just an extra $50 or $100 a paycheck—to make more of your retirement contributions (and their tax benefits).
