Many of us only stop to focus on our taxes in the weeks leading up to Tax Day. But in reality, taxes are something you should be thinking about year-round. Now that we're halfway through 2016, here are a few smart tax moves to make sooner rather than later.
1. Examine and adjust your withholding
If you're a salaried employee, the company you work for is required to withhold a certain portion of your income for taxes. But the key is to get that withholding amount just right. If you withhold too little, you might face a penalty for underpayment when you file your tax return. On the flip side, if you withhold too much, what you essentially wind up doing is lending the government some of your income for free -- income you could otherwise use to invest, pay off debt, or enhance your present-day quality of life.
That's why it's wise to take a look at your withholding periodically, and make adjustments as needed. If you've had, or anticipate, an uptick in income this year, you may want to increase your withholding. The same holds true if you've sold, or are planning to sell, certain investments at a profit.
On the other hand, if you're making less than you were last year, or if you've added a child to your family this year, you might consider decreasing your withholding to get more money in your paychecks up front.
2. Review your estimated tax payments
If you're self-employed or have sizable income from sources other than employment, you're responsible for making estimated tax payments to the government each quarter. Thankfully, there are online tools to help you determine how much you should be paying each year, and from there it's a simple matter of taking your total annual tax liability, and dividing it by four. That said, some people fall into the trap of making the same estimated payment quarter after quarter, regardless of changes in income.
As is the case with salaried employees, paying too little can come at a cost, while paying too much tax could mean shortchanging yourself in the near term. So take a look at your earnings and deductions to date, and see if the amount you're paying is on target, or needs to be adjusted.
3. Organize and catalog your receipts
Whether you're a salaried employee or are self-employed, you may be eligible for certain tax deductions. But unless you keep an accurate record of those deductions, you'll have trouble claiming them when the time comes to file your taxes. Furthermore, guessing at deductions, as opposed to relying on solid figures, could increase your risk of getting audited.
If you've been lax in your record keeping thus far, now's the time to get organized. Gather your receipts for child-care payments, medical expenses, and business purchases, and file them in a place where they'll be accessible come tax time. Better yet, scan your receipts, and save them electronically, so you don't have to worry about losing your physical copies. If you use your vehicle for business purposes, now's also a good time to review your mileage log, and make sure it's up to date.
4. Increase your retirement plan contributions
Saving for retirement doesn't just mean paving the way for a comfortable lifestyle in the future; it could also mean saving major bucks on your taxes upfront. Contributions you make to a traditional IRA or 401(k) plan are done on a pre-tax basis. In other words, if you put $5,000 this year into your 401(k), you won't pay taxes on that money until you withdraw it in retirement.
If your tax burden has increased this year, be it due to higher earnings or capital gains, a good way to combat that is to put more money into a tax-advantaged retirement account. And the sooner you do, the more time you'll give that money to grow. Even a small monthly increase can really add up over time. Assuming your investments generate an average annual return of 8%, saving an additional $100 a month over the course of 30 years will result in an extra $136,000 to fund your retirement.
Before you get caught up in the whirlwind of summer, take the time to review your tax situation, and see what changes you might need to make. A little extra planning now could make your life much easier when the time comes to file your annual return.