1. Understanding Your Financial Situation
Review prior tax returns to understand sources of income. Know what states and cities tax your income and understand your marginal tax rate.
Start Small: Spend some time looking over your prior year return. Do you have any questions, or are there any calculations you do not understand?
Think Bigger: Ask a professional, such as a CPA to review your prior year return with you. They will be able to explain where the information is coming from, and what factors are leading to your current tax liability.
2. Maximizing Potential Deductions
Certain business and personal expenses can reduce your taxable income, such as business expenses, HSA contributions, and retirement savings.
Start Small: Plan to contribute a small amount from each paycheck to your retirement account or health savings account. Keep track of these amounts, so you can report them come tax time.
Think Bigger: Your CPA should be able to provide you with some insight on common deductions for your situation. Ask them if there are any deductions you should be taking advantage of. Make sure you are maximizing your annual contributions to tax deductible accounts, such as retirement account or health savings accounts, before opening any new accounts or implementing new tax strategies.
3. Reviewing Passive Income
Many individuals have passive sources of income such as investment accounts or real estate. Make sure you understand how much income is expected and how it is taxed.
Start Small: Research ways to make passive income and consider how that income will be taxed on your return.
Think Bigger: Meet with your financial advisor to develop a multi-year plan for your passive income. Consider how you can best utilize the more favorable long term taxable gain rates to reduce your income tax liability, or how harvesting tax losses on investments might impact your return.
4. Creating a Tax Projection
List expected income and deductions for the upcoming year and determine what tax rates will apply to the year's income.
Start Small: Make a list of all of the ways you made money this year, such as through your weekly paycheck, performance bonuses, and part-time jobs or side hustles. Did you win any contests or lottery prizes? Did you sell anything, either in person or online? All forms of income, no matter how big or small, are relevant when it comes to income taxes.
Think Bigger: Work with your CPA to create multiple tax projections based on potential income levels. Consider how changes in active, passive, or portfolio income impact the big picture.
5. Making Estimated Payments
Many individuals and small businesses make quarterly payments toward their annual tax bill. These payments help monitor cash flow and avoid penalties come filing season.
Start Small: Compare the amount of taxes that have been withheld from your paycheck this year to what you’re expecting to owe. If there’s a large difference between these amounts, you should probably contact a tax professional for help in generating an estimated payment before the end of the year.
Think Bigger: If you have already met your Safe Harbor tax payments for the year, you will likely be able to avoid underpayment penalties. But if you’re expecting to owe come filing season, it is recommended that you begin to set money aside early so you can pay the tax bill when it comes due. Consider setting aside a portion of your income between now and the filing deadline.
Whatever your age or income level, it is never too early to invest in understanding your financial position and setting yourself up for the future. If you’re looking for a professional who can take the complexity and headache out of tax planning, contact us today at kataxandconsulting@gmail.com
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