For many of us, the tax season ends with a sigh of relief. Believe me, I understand. But if you can catch your breath and make time to plan for next year’s taxes now, you’ll save yourself time and money. This is a large area to cover, but I’ve put together some of the more common scenarios that can be helped by good planning. Have a look to see if any of these apply to you. Feel free to contact me, Stu Steinberg, if you have questions about your situation
1) You are a New Business Owner
If you start a new business that is profitable right out of the gate, consider paying taxes on quarterly installments. It’s the best way to stay on top of what you owe. Tax situations change all the time, especially when new tax laws are introduced. For example, in 2012, in addition to paying ordinary income taxes, self-employed people must pay a 15.3% self-employment tax. It’s best to meet early with your qualified advisor and bookkeeper to so that you can avoid falling behind on planning.
2) You’ve Exercised Incentive Stock Options
People who exercise and sell their stock options often see their good fortune turn a little sour at the end of the year. Often, employers don’t withhold enough for taxes on the transaction, and this results in a surprisingly high tax bill. Also, stock options are often reported as ordinary income. That boosts the recipient into a higher tax bracket, a fact that results in a larger tax bill. That is never a nice surprise at tax time.
3) You Had or Will Have a Change in Marital Status
If you are recently divorced, your tax filing status and your tax deductions might be significantly changed. You might not be able claim the same number of children. If you’re used to writing off the interest you pay on the house you live in, understand that you might not be able to do that this year. There could be a substantial change in what you owe the IRS. Also, there are tax implications when you remarry. We often encourage couples to put the wedding off at least until January, so that they can minimize the tax impact.
4) You Withdrew Money from Your Retirement Plan
If you take money from your IRA or 401K, it’s critical that you withhold the appropriate federal and state income taxes on that withdrawal. If you’re younger than 59 ½, you will likely pay a 10% early withdrawal penalty on that money. I always caution my clients to avoid taking money out of their retirement plans. It is only a last resort.
5) You Get A Large Refund from the IRS
Getting a refund check from the government feels good. But it only means you’ve given Uncle Sam an interest free loan. If you update your W-4 and decrease your federal tax withholding, you can start collecting a larger pay check throughout the year. Save some of the money and put it to work for you in an investment account.
As with any tax situation, the better you plan the better off you will be. The key is leaving yourself time and your qualified advisor enough time to cover all your bases.