w4-adjust-withholdingsThe goal of tax planning is to arrange your financial affairs to minimize your taxes and in doing so keep more money in your pocket. For many people, you don’t have to be a tax expert to start your own tax plan. By following some guidelines and being aware of changes during your life, you generally can do a pretty good job yourself. This article will present helpful pointers you may not be aware of to assist you while you evaluate your tax plan and trim your taxes. As part of a series of tax planning strategies, we begin with the overall big picture for all age groups.  

Overall Big Picture for All Age Groups

Income and Tax Withholdings

The more you make, the more you pay. Depending on how big your raise is, you may be in a different tax bracket. The fact is that higher taxes are a cost of being successful, so don’t be totally discouraged that you may be paying more tax money if you are making more throughout your life. However, you need to be aware of your tax withholdings on your pay stubs. “Withholding” means the amount of taxes taken out of your pay check for federal and state taxes. Not having enough taxes withheld from your paychecks could result in a high tax bill and potential penalties when you file your tax return. You can use a tax refund calculator and W-4 calculator, such as the ones on Taxbrain.com, to estimate your withholdings. Once you find what your withholding allowances should be, you will need to get with your employer and complete a new Form W-4 (Employee’s Withholding Allowance Certificate) if there are any needed changes. The information you report on a Form W-4 is used to calculate how much of your tax will be paid from your paycheck every period. Keep in mind you can always complete a new Form W-4 with your employer at any time and adjust your withholding. In general, the best tax return is a return where you owe a little money. Yes, I know we love to see refunds, but in reality a refund generally means you loaned some money to Uncle Sam during the year, and you’re just getting your money returned to you without interest. Your goal is to owe a little tax, but not too large to trigger a penalty (usually $1,000 or more of tax on a federal return may trigger penalties). However, some people like the idea of getting a refund because they don’t want to think about saving money during the year to pay a tax bill during tax time. For these people, getting a refund gives them a psychological peace of mind of not worrying about future tax obligations to pay. When making your tax plan, you should make your decision on whether to owe or get a refund based on what you will be comfortable with. When looking at tax planning, look at both the long term (future tax years) and short term (next tax year). Certain tax deductions can benefit you this year, but they could hurt you with higher taxes in later tax years. Estimate what will give you the best outcome with the least amount of risk.

401(k)/403(b) Plans

Consider putting money aside into a 401(k) or 403(b) retirement plan. If your employer matches your contribution into a retirement plan, you should take advantage of this benefit as much as possible and at least contribute up to the maximum amount the employer matches. Also, the money you contribute to a 401(k) is considered pretax contributions, meaning that the money you set aside in the plan during the year is not included in income when reporting your taxable income on your tax return. However, if you have an employer that does not match your contributions into the plan, putting money into the employer’s 401(k) or 403(b) plan may not be your best investment option. The money you and your employer contribute and interest you earn in these plans are all taxable when you cash them out in the future. With today’s national debt and government need for more revenue, it is very likely tax rates will go up; as a result, you risk deferring your taxes now for a higher tax rate in the future. You risk hefty taxes and penalties on both your federal and state returns if you need money and pull out it prematurely (before retirement age).

Traditional IRA

If your employer does not offer a 401(k) or 403(b) plan, you can instead put money into a Traditional IRA (Individual Retirement Account) at a bank or financial institution. The benefits are similar to a 401(k)/403(b) such that contributions into the plan may be taken as a deduction on your return. Contributions to these IRAs (and combined with Roth IRAs, explained next) are limited to $5,000 (or $6,000 if age 50 or over) per year. Unlike a 401(k) or 403(b) plan, you can make contributions after the tax year has ended, but before filing your return, and elect to have those contributions applied to your return. For example, you can make a $5,000 contribution to an IRA before filing your 2012 taxes in March of 2013, and elect to have the contribution applied to your 2012 tax return. Make sure you notify your bank or financial institution of this election to make it valid.

Roth IRA

Consider a Roth IRA when looking at your long term plan. The interest you make in a Roth IRA is usually not going to be taxed. This is a great way to save if you can at any age. Be aware that there is a phase-out limitation on how much you can contribute for higher income taxpayers (incomes over $107,000 for single filers and $169,000 for joint filers). Like this and want more tax advice? As part of a series of tax planning strategies, we’ve broken down tax advice for specific age groups: Generation Y and Millennials, GenX’ers, those at the "Top of the Hill," Baby Boomers and the Silver Foxes at or nearing retirement. Not using Taxbrain.com yet? With Taxbrain, you can get all the free technical support you need to prepare your own taxes. We can help you trim your taxes, so you can get the maximum refund you deserve. Get your free account now, visit Taxbrain.com today. Vincent Mangiapane, EA Federal Analyst, Taxbrain