The information in this article is up to date through tax year 2019 (taxes filed in 2020).
Tax planning is something you can do anytime during the year. Take advantage of the summer months to maximize your tax breaks and prepare for any new changes, so you won’t be surprised when you file. Here are five things you can do now to ensure you pay only what you owe and get the refund you deserve at tax time.
1. Check your withholdings
The summer is a great time to check up on how much money is being withheld from your paycheck, because you’ll still have plenty of time to make up for any underpayments or to account for any significant changes that might have taken place since you filed your last tax return.
Anytime you go through a major life event – like getting married or divorced, selling or buying a home, having a baby, etc. – the amount you have withheld for federal income taxes will need to change. Did you pick up a new side gig or has your income changed significantly since you filed? If so, those factors will also affect how much your employer should hold out of your paychecks for taxes. Read also: When to Check Your Withholdings
2. Pay your quarterly estimated tax
Do you have extra income coming in that is not subject to withholdings? Rent payments, investment interest, freelance income, gambling winnings – all of these are ways that you might be earning revenue that is not accounted for on your W-4. If you don’t have enough withheld for taxes during the year, you could be hit with a tax bill when you file your return. To prevent this, the IRS recommends making quarterly estimated payments toward your tax liability.
3. Check for new tax law changes
Did you get more money back from the IRS than you expected last year? Did you have a tax bill instead of a refund? If you were at all surprised by the outcome of your taxes when you filed, it could have been because of tax law changes. A few times in history, the entire tax code has been changed at once. This is known as tax reform. In 2017, the Tax Cuts and Jobs Act overhauled many important laws that affected all American taxpayers. See the TCJA at a glance.
Some changes are not as significant as reforming the whole system. For instance, certain deductions – like the standard deduction – increase by a certain amount each year to account for inflation. This may not seem like a big deal, but it can still impact how much you owe or get back in your refund.
4. Contribute to your retirement plan
You have until the April tax filing deadline to max out contributions to your IRA retirement savings plan, and it’s smart to set money aside all year long. The annual limit for IRA contributions 2019 is $6,000, or $7,000 if you’re age 50 or older. If you have a Roth IRA, your contributions may be limited, depending on your filing status and income. See tips for making the most of your IRA contributions.
5. Save your summer childcare and camp receipts
For many working parents, putting children in daycare or summer camp is especially important during the months that school is out of session. The IRS understands that this is a necessary expense and that it can sometimes be very costly. The Child and Dependent Care Credit is a tax break offered to parents who are working, looking for work, or in school full-time. To be eligible, your dependent must be under the age of 13 or physically or mentally incapable of taking care of themselves. For a full list of eligibility requirements, visit the IRS website here.