How To Use Tax Time To Proactively Plan Ahead

March 30, 2018

Whether you are still trying to get your tax information organized to meet this year’s income tax filing deadline or using this time of year as a proactive start to your tax planning efforts based on the new tax law, here are a few tips to help make the most of that time.

When you’re not sure about DIY software vs. using a tax pro

Online tax preparation software is relatively inexpensive and fairly easy to use if you take the time to go through the step-by-step guidance and Q&As — which one is best is open for debate in our industry. However, the key is that you have to be committed to getting it right — if you are more interested in finishing your return than finishing it accurately, your tax software may create a “garbage in, garbage out” situation according to my colleague Greg Ward.

How you should do your taxes generally depends on the complexity of your financial situation and the amount of time you are willing to devote to trying to complete your return on your own. If you are not sure if you are cut out to prepare your own returns with some guidance, check to see if you qualify for free income tax preparation services (generally for lower income people) or at least kick the tires and give online tax preparation software a free spin. Most tax software packages allow you to start for free and do not require payment until you are ready to file.

If you know you want to use a tax pro, check out these tips from my colleague Kelley on finding one in your area.

When you’re worried about being able to file on time

When time is running out to stay off of Uncle Sam’s naughty list and complete your income tax returns prior to the April deadline, the good news is that you can request a six month extension to wait until October to file. The most important thing to know here is that while you can push back your filing deadline, you still have to pay any taxes due by the April deadline. Expecting a refund? You’ll have to wait until you file to get that… If you’re not sure what you’ll have due, you’ll have to do your best to estimate — any underpayment will be subject to interest and penalties.

I have worked with many people that need the extra time to overcome the procrastination demons or simply pull together financial records for rental properties, investments, and small businesses. Some small business owners even use those extra six months to allow for more time to set aside money for last minute SEP IRA or other self-employed retirement plan contributions. If you decide to extend, you do have to file a Form 4868 to let the IRS know that you’re on it.

When you need last minute tax-savings tips

If you find yourself owing for the year and want to find a few ways to reduce the balance due, there are some steps you can take, although you’ll have to come up with more money in total.

  • Contributing to a deductible IRA is an option if you are working but not covered by a qualified plan (like a 401k) at work or if you are participating in a plan and have income below certain limits.
  • If you have a nonworking spouse under age 70 1/2 and enough earned income, you can make a deductible contribution to a spousal IRA too, subjected to higher income limits.
  • Health savings account (HSA) contributions are another excellent way to save on taxes today and for health care expenses now or later in life if you are covered by a high deductible health plan, assuming you didn’t max out your contributions for the prior year already. Remember that if you are age 55 or older, there is an additional $1,000 catch-up contribution beyond the annual limits.
  • Contact your HSA custodian to see how to make your contribution via direct deposit and verify that it is assigned as a previous year contribution — you don’t have to do it through payroll.
  • For both IRA and HSA contributions, the April deadline still stands even if you file an extension, so be sure to take action soon.

When you want to get to owe/refund: $0

It is essential to go beyond focusing on the amount you overpaid or the amount you owe on IRS Form 1040 when trying to get both numbers to zero. Determining if you are on track to receive a tax refund or will end up owing the IRS in the current year is a good place to start with a proactive income tax plan.

Update your paycheck withholdings

In order to make changes to your withholding, you will need to fill out a new Form W-4 and provide this form to your payroll department. However, prior to making any changes to the W-4, you might want to review the IRS withholding calculator to estimate the correct withholding for you and your family’s situation. If you are looking for a second opinion or just want to double check your entries, try the TurboTax W-4 withholding calculator.

When you want to reduce your taxes for the current year

Filing your tax return should not be the end of your tax planning efforts but should mark the next step in your current year plans. This process of planning ahead requires a quick assessment of where you stand today. To get started with your income tax planning, take some time to get your important financial documents together. Organize your financial statements and have a copy of your most recent tax return on hand.

Maximizing all tax savings options

Remember that the goal should not be to just “get it right” in the eyes of the IRS or just minimize the amount of taxes owed. You will still want to make sure you maximize all potential tax exemptions, deductions, and credits but also consider reallocating investments in taxable accounts to more tax-efficient options. Plan ahead so you can contribute as much as possible to your employer’s retirement plan, IRAs, HSAs, and possibly 529 college savings plans.

Give with purpose and meaning to charitable organizations with an added bonus of tax benefits from Uncle Sam for your good deeds. If you start the planning today, you will not have to scramble at the end of the year to find last minute techniques to lower your taxes.

A final word about tax planning

Whether you prepare your taxes using tax preparation software or use the help and guidance of a tax preparer, you should review your tax return and look beyond the bottom line of owing money or getting back a refund. Be sure to make a note of anything on the return that you do not completely understand and use it as motivation to educate yourself about these specific items. The more familiar you become with the information that appears on your tax return, the better positioned you will be to plan to minimize your taxes in the future.