It's tax time again. Some of us will look with great anticipation for a nice refund, while others put filing until the last minute because simply it's going to come down to an amount due. But regardless of what this tax year has brought to each of us, we all have one commonality: we all can (and should) try to plan better for next year's tax season. Though this year may already be a done deal, next year is still anybody's ball game. Here are some things to consider when planning your personal finances and taxes for next year:
- Should I change my allowances? Perhaps this year you had to pay taxes on April 15th. If so, you may have claimed too many allowances on your W-4 form at work. There are a certain amount of allowances that you're entitled to take – but that doesn't mean that you're required to take them. Letting the government withhold more of your pay than is necessary is one way to avoid the tax man the next time around. But don't put yourself in financial straits; if you need the money to live on, take it. Also keep in mind that when you withhold more in order to get a tax refund, you're actually giving the government an interest-free loan for the year.
- Will I sell my home this year? Homeowners get a huge deduction when they sell their primary residence. The government allows them a break on the capital gains realized from the sale of their residence. For an individual, this deduction can be up to $250,000 of the capital gain ($500,000 for a couple). There are some stipulations, however; the biggest of which being that the residence must have been lived in for at least twenty-four months of the previous five years before the sale, though that time does not have to run consecutively.
- Start thinking about next year's tax credits right now. This year you may have qualified for the earned income tax credit. Next year, your kids might be ready for college. Look into the education credits that are available to parents who make qualifying purchases for educational expenses. There are thousand of dollars in credits that you may be eligible for.
- Learn to itemize. Perhaps you made charitable contributions last year but it wasn't enough to reach the minimum threshold limit. In addition to increasing your contributions this time around, look for other expenses that would qualify you to itemize and be eligible for a larger deduction on your taxes. But, be sure to read the fine print and know the requirements for each deduction.
- Use the best filing status for your circumstance. Let's say, for example, you're single and filed that way. But, you're also a parent. That qualifies you to file as "Head of Household." What's the difference? Filing "Head of Household" entitles you to a larger standard deduction that the "Single" filing status. Many people actually have a choice between two filing statuses but they don't bother to compare the benefits and drawbacks of each. Take a few extra minutes and choose wisely.
If you really think about it, it's always tax time. Just a little prudent planning throughout the year will keep the 'tax season' from being an unpleasant one for you.
