Now that your taxes are filed for 2015, it’s time to plan ahead for next tax season! Following a few simple tips will save you a lot of time and stress come January 2016.
1. Check your withholding: Did you owe money in 2014 and you’re not self-employed? Chances are you might not be withholding enough tax from your paycheck. Although if your refund was for more than a thousand dollars, there is a good chance you are withholding too much, and could be taking more home each week in your paycheck. Your withholding tax is based off of the information you provided on your W-4 form. The more allowances you claim on Line 5, the less tax your employer withholds. The fewer exemptions you claim, the more tax is withheld. Ask your employer if you can see your current W-4 to see what may be wrong in your withholdings.
2. Increase your retirement contributions: Did you know that money you contribute to your 401(k), 403, or SIMPLE account reduces your taxable income? This can actually reduce your tax bill! Some employers will even match contributions to a certain extent. But, that doesn’t mean you should only contribute up to what you’re employer will match. By investing early, you have the advantage of compounding interest!
3. Make HSA contributions: Do you have a high-deductible health plan? You can make HSA contributions through your paycheck to reduce your taxable income. Paycheck contributions (through a cafeteria or 125 plan) can also reduce the amount of wages subject to FICA tax. While you can make contributions outside of work, the contributions will only reduce your income tax and you won’t get to take advantage of this double benefit!
4. Know your tax bracket: Do you know how much of your income was taxed at 10, 15 or 20 percent? The U.S. has a progressive tax system, which means your income is separated into brackets and each bracket is taxed at that percent. Unfortunately, there is no gradual increase and once you reach the edge of the 15 percent bracket, for example, an additional dollar of income goes from being taxed at 15 percent to 25 percent. To find where your taxable income is reported look at Line of Form 1040.
5. Have a plan and seek advice: Do you have questions or you planning on making big financial decisions? Give me a call and let’s discuss it!