Mid-Year Tax Update

Okay, so it’s not quite mid-year yet, but with the second quarter coming to a close, it’s time to start thinking about taxes (if you ever stopped).  Here are some tips to ensure that your tax bill is right where you want it to be next April.

If you’re employed by someone else:

Did you owe a lot last year, or receive a large refund? I know many people like to receive big refund checks but, in my mind, that’s just loaning money to the government that you could be using all year round. Take a look at your withholdings and determine if you need to adjust them. Again, the IRS makes this pretty easy by providing a withholding calculator.  Take a few minutes to walk through this and then ask your company’s payroll or HR person for a new W-4 form to fill out. I find this is actually a valuable exercise to go through each year.

If you’re self-employed:

Those of us who are self-employed have a particularly challenging task. Since our Social Security and Medicare taxes aren’t automatically withheld, we have to be disciplined enough to withhold them ourselves. Otherwise, you’re going to be hit with a 15.3% tax on EVERYTHING you earned at the end of the year. I recommend taking a full 25% of every check you receive and socking it away into savings, in preparation for your tax bill.

If you expect to owe at least $1,000 in 2012, you should be paying quarterly tax payments (or expect to be hit with a penalty when you file your 2012 taxes).  The next quarterly payment is due June 15.  If you need help figuring out how much you owe in quarterly taxes, consult your accountant or, if you speak tax code, check out this handy resource.

Other tax considerations:

Make sure, as the year goes on, that you’re obtaining receipts for any charitable contributions that you make. Remember that charitable contributions don’t necessarily mean cash. If you take clothes to Goodwill, or make a quilt for a charity auction, you can deduct these things as well (as long as you have a receipt).  The IRS requires written acknowledgement from the charity receiving the goods if you have a donation greater than a $250 value.  Otherwise, you can use cancelled checks or bank statements as substantiation.

Finally, if your tax bill is confounding to you, consider evaluating your debt and shifting it more towards deductible interest.  For example, if you have a number of credit card bills (the interest on which is non-deductible), but some equity in your home, consider taking out a home equity loan to pay off your credit card bills.  In most cases, home equity interest is a deductible expense.

Additional questions?  Concerns?  Please leave them in the comments!

Disclaimer: This post is intended to be for general informational purposes about tax planning and overall IRS tips. Please do not consider any of this consultation for your individual tax or legal needs. I urge you to consult your own tax expert with further questions. Any information contained in this post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document.