The year is now half over and although most Americans wait until next April to think about taxes, I highly recommend tax planning throughout the year. The summer is a great time to review your finances since you will still have six months to make any changes to your withholdings, or take action to lower your tax liability.
Mid-Year Tax Projection
Since the year is half way finished, you can easily estimate what your total income for the year will be. Unless you anticipate a new job or are self-employed and unsure of your earnings for the rest of the year, you can simply add up your wages from January through June and double it. Using the 2010 income tax brackets you can then calculate your total federal tax rate. Look to see what you have already paid in federal taxes, and if your total taxes paid is less than half of your yearly tax liability then you might want to consider adjusting your withholdings or making an estimated tax payment.
Review your Withholdings
If you are underpaying on your federal taxes, you might want to adjust your withholdings. For wage earning employees, you can simply ask your employer for a new IRS Form W4. Either change your allowances or have an additional dollar amount withheld from your paychecks. If you have been overpaying the IRS, you might want to change your withholdings to have less taken out of your paychecks. Although you might not get as large of a refund in April, you will have more money in your wallet each month!
Estimated Tax Payments
If you are self-employed or have decent capital gains throughout the year, it is especially smart to calculate your 2010 tax liability. The IRS will asses a penalty if you underpay your taxes, so it might be a good idea to make an estimated tax payment. The most recent quarterly tax payment due date was June 15th, but you can always make a late payment. The next payment is due Sept. 15. To learn more about estimated tax payments check out this entry on the Roni Deutch Tax Center – Tax Help Blog.
Organize your Files
When you have a few hours free, it might be a good idea to look over your financial records and tax related documents. Make sure you have documentation for any tax deductions or credits you plan to claim: all of your pay stubs, and receipts for any business or travel expenses you intend to write off. If you are missing any receipts you should try looking for documentation via your credit card or bank statements. This will be easier to do now, instead of six months from now when you might not exactly remember what day it was you took that client out to lunch or where you went.
Retirement Accounts
Depending on your unique financial situation you might want to consider opening a retirement account this summer. If you have a little extra money after your summer vacation why not use it to setup an IRA or 401(k). Some retirement plans – such as traditional IRAs – have significant tax implications and can lower your total tax liability.
Give to Charity
Another great way to lower your tax liability is to make charitable contributions. You could donate your winter clothing, as you will not need it in the hot summer weather, or any other household items you no longer need. Additionally, as the BP oil leak continues to spew oil into the Gulf you could make a monetary donation to a group working on the cleanup such as the National Wildlife Foundation.