Take Some Time This Summer To Make Necessary Tax Adjustments
By Maura Schauss, CFP®
Summer is sailing along, and you’re catching up on your to-do list. As you browse through your list, there’s one item that catches your eye: Get on Top of Taxes. It’s a dreaded to-do item that seems to occur every single year. If you feel like you’re always hit with a tax bill, it may be because of one of these four reasons:
- You’re not withholding enough from your paycheck.
- You have extra income that isn’t subject to tax withholdings (rental and portfolio income.)
- You’re not making quarterly estimated tax payments.
- There are changes in your tax return (such as no longer having dependents.)
Thankfully, there are certain things you can do to correct these problems. Continue reading to find out some quick and relatively easy steps you can still take now to minimize the amount of taxes you’ll owe next year.
Step 1: Increase Your Tax Withholding
The W-4 you filled out with your current employer could no longer be relevant. Maybe you had dependents when you started your job five years ago, but now your children have moved out of the house. Or maybe you were single, but now you’ve been married for a while. If you’ve overestimated your dependents or your filing status, then your employer may be withholding less money than you owe (which is why you’re hit with a tax bill every year).
If you’re having too little taxes withheld from your paycheck, fill out a new W-4 form with your human resources department.
Step 2: Have Extra Income Taken Out Of Each Paycheck
Remember that your W-4 only applies to income earned through your employer. If you earn income from somewhere else (such as selling stocks or taking on a freelance project), these earnings aren’t taxed up front. To help cover the tax burden of your side income, you can request that additional amounts be withheld from your paycheck each period by filling out line 6 on the W4 form. It’s that easy! You’re free to choose any amount you wish to be withheld. If for some reason you withhold too much, you’ll get a refund come tax time.
Step 3: Withhold More Of Your IRA Distributions
The financial institution you have your IRA through should automatically withhold a certain percentage of your IRA distributions for taxes. If you were faced with a large tax bill last year, the percentage they’re withholding may be too low. Luckily, you can elect to have a higher percentage of taxes withheld from your distribution. Contact your IRA institution to get this changed.
Step 4: Make Estimated Tax Payments
If you’re self-employed, make additional money through rental property and investments, or expect to owe more than $1,000 in taxes, you may need to make estimated quarterly tax payments. These payments can be made using Form 1040-ES: Estimated Tax for Individuals (there’s even a worksheet to help you figure out your estimated payments). If you struggle with making quarterly payments, open a bank account specifically for your taxes. As you get paid, transfer a portion into the account and then don’t touch it.
Step 5: Meet With A Trusted Professional
Your financial picture is complex, and there are many reasons why you may owe taxes every year. At Washington Wealth Advisors, we’d be happy to look over your current wealth management plan and identify ways you can minimize your tax bill. From retirement plan savings to hidden income in your portfolio, we can help you create a tax-efficient investment strategy that keeps more money in your pocket. To learn more, click here to schedule a meeting with us or call us at 703.584.2700.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.