Did you end up paying more in taxes than expected this year? If so, it’s time to start preparing and improving for next year. Here are some steps you can take to get started.
Review Your Withholding
One reason you might have had to pay a large sum in taxes is that your withholding was too low. If you’re an employee, your employer withholds taxes from each paycheck based on the information you provide on your W-4 form. If you’re self-employed, you’re responsible for making estimated tax payments throughout the year. To avoid a big tax bill next year, review your withholding or estimated tax payments. Consider adjusting your W-4 to withhold more from each paycheck.
Additionally, if your personal or financial situation changes throughout the year, you may need to adjust your W-4 again to ensure that you’re having the correct amount of taxes withheld from your paycheck.
Track Your Expenses
One way to reduce your tax bill is to take advantage of tax deductions and credits. Some common deductions and credits include charitable donations, medical expenses, education expenses, and business expenses.
Make it a habit to keep track of your expenses throughout the year. You can use a spreadsheet or accounting software to make this easier. By keeping good records, you’ll be able to take advantage of all the deductions and credits you’re entitled to.
Consider Tax-advantaged Account Contributions
Explore options for investing in tax-advantaged accounts, such as a 401(k), IRA, or HSA. These accounts can help reduce your tax bill because contributions are tax-deductible, which will reduce your taxable income.
If you’re not already contributing to a retirement account, consider doing so. If you are contributing, consider increasing your contributions for next year. Not only will you be saving for your future, but you’ll also be reducing your tax bill.
Create a Tax Savings Account
By opening a separate savings account for taxes and regularly contributing to it, you can help ensure that you’re prepared when tax season rolls around. Keeping your tax money separate from your regular spending accounts will ensure that you have enough money set aside to pay your taxes when they’re due.
Once you have the account, you can set up weekly, biweekly, or monthly automatic transfers from your checking account to your tax savings account. Resist the temptation to dip into this account for other expenses, as this could leave you short on funds when it comes time to pay your taxes.
Get Professional Help
If you’re still struggling to figure out why you owed so much in taxes this year, it might be time to get professional help. A tax professional can review your individual situation and help you come up with a plan to reduce your tax bill for next year.
Consider hiring a certified public accountant (CPA) or an enrolled agent (EA) to help you with your taxes. These professionals have the expertise to help you navigate complex tax rules and regulations.
In conclusion, if you found yourself having to pay a lot of taxes this year, don’t despair. There are steps you can take to prepare and improve for next year. By reviewing your withholding, tracking your expenses, considering contributions, creating a tax savings account, and getting professional help, you can reduce your tax bill and keep more of your hard-earned money. Please keep in mind that everyone’s financial situation is unique, and this article does not constitute financial advice.
