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Were you hit with a tax bill this year, and can't quite figure out why? You could amend your return if you suspect inaccuracies. But if your return is spot on, the next step is to start planning ahead now so history doesn't repeat itself next year.
Here are some tips to help you out.
Make sure you input the correct number of allowances on your Form W-4 (Employee's Withholding Allowance Certificate). That way, your employer will withhold the proper amount of federal income tax from your earnings.
SEE ALSO: 4 Tax Deductions You Had No Idea Existed
Of course, having too much withheld equates to a larger refund. But this isn't a good thing if you have to scrape by all year. Plus, you could give yourself a raise instead of waiting for a refund check. But having too little withheld means you could owe. To avoid both scenarios, use the IRS Withholding Calculator.
It's true. Unemployment income is still subject to federal income taxation. That may not be music to your ears, especially if times are hard, but that's what the Tax Code mandates. As such, it's best to make quarterly tax payments or request federal income tax simply be withheld.
If you're self-employed and wait until tax time to calculate how much you owe the IRS, brace yourself: What you discover may shock you. Unlike wage earners, independent contractors are also subject to the self-employment tax. Plus, they must foot the bill for their Social Security and Medicare taxes.
The amount owed could be well the thousands, unless you have a ton of allowable business expenses to deduct or incurred a net loss.
Here's a better idea: Calculate your estimated tax liability by completing Form 1040-ES (Estimated Tax for Individuals). And as income rolls in, deposit the funds in a bank account so you'll have the cash on hand when it's time to make quarterly tax payments.
Did you leave deductions on the table? Commonly overlooked deductions include expenses for relocation, job searches, and energy-saving home improvements, just to name a few. These can reduce your taxable income, which is the figure used to determine how much you owe Uncle Sam.
Be sure to keep track of all the possible deductions you may qualify for (and their receipts), so you'll be prepared when tax time rolls around next year.
Once you've capitalized on pre-tax deductions, take a look at the credits you may qualify for. Tax credits reduce your tax liability — the amount you owe to Uncle Sam — so they could get you closer to breaking even or receiving a refund when you file next year.
Retirement contributions, that is. Are you take advantage of your employer's 401(k) match? If not, jump on the opportunity to earn free money and reduce your taxable income while you're at it.
SEE ALSO: Should You Do Your Own Taxes?
If you have another type of traditional IRA, consider beefing up contributions to lower your taxable income. And if you're self-employed and don't have a retirement account, consult with your financial adviser to learn more about the pre-tax retirement options that may be available to you.
Don't worry if you're low on cash. You don't have to donate thousands of dollars to be charitable. According to the IRS, "you generally can deduct the fair market value of any property you donate to qualified organizations."
To determine if your charitable contributions are deductible, the IRS has a handy tool to help you out. Just keep it mind that it may only make sense to write-off charitable contributions if the aggregate amount exceeds your standard deduction, as you'll have to itemize to take advantage of the deduction.
When in doubt, solicit the assistance of a reputable tax professional to help you devise a strategy for next year. You may have to make a small investment, but it'll be worth the peace of mind and money saved!
Readers, what are some of your favorite strategies for saving on taxes? Do you withhold a ton from your paycheck to maximize your refund later, or do you itemize deductions like a pro? Share your tips in the comments below!