The 2019 tax season is drawing to a close, and you're probably happy you can forget about taxes again for a whole year. But if you do that, you could be making next year's tax season more difficult for yourself. You may file a tax return only once a year, but taxes affect you year-round. By understanding this and beginning to prepare for this year's taxes now, you can make the 2020 tax season a much smoother ride. Here are four steps you should take now to get ready.
Decide whether to adjust your tax withholding
If you work for an employer, the government takes a cut of your earnings from each paycheck. The amount it takes depends on how much you earn and how many tax allowances you've claimed. The more allowances you claim, the less money the government will take from each paycheck. Usually, single adults will claim one or two allowances, while working parents may claim more.
If you claim more allowances, your paychecks will be larger, but your tax refund check could be smaller because the amount you pay in throughout the year is closer to your actual tax liability. You don't want to claim more allowances than you should, or else you could owe taxes at the end of the year.
Look at your 2018 tax refund check. If it was several thousand dollars, that could be an indication that you're not claiming enough allowances. Use the IRS Withholding Calculator if you're not sure how many allowances you should be claiming, and check with your company's HR department if you're not sure how many allowances you're claiming now. You chose your allowances on the W-4 form you filled out when you started your job, but you can change it at any time by submitting a new W-4 form to your employer.
Set up a system to keep track of deductible expenses
This mostly applies to self-employed individuals, who may need to deduct travel, office expenses, and other business-related costs on their taxes. But there are other deductions that anyone can qualify for, like medical expenses that exceed more than 10% of your adjusted gross income (AGI) -- your income minus certain tax deductions -- for 2019 or charitable contributions you made to a church, volunteer fire department, or nonprofit organization.
The catch is, you can only claim these deductions if you have the paperwork to back them up. You don't have to submit this with your taxes, but you have to present it if you get audited or the government could disallow your deductions.
Keep a folder with your receipts and all paperwork related to your tax deductions so you have them all in one place when you file your taxes next year. If you don't like the idea of paperwork cluttering your house, consider scanning all your receipts and tax documents into your computer so you have digital copies instead. Just be sure to back them up so you don't lose them.
Plan for estimated taxes if you're self-employed
Self-employed workers must pay estimated taxes quarterly, since they do not have regular paychecks that the government can withhold taxes from. Failure to pay estimated quarterly taxes could result in a penalty. If you were self-employed in 2018, your 2018 tax return should indicate how much you should pay in each quarter based on your 2018 earnings, but you may need to set aside more or less if you expect your earnings to be higher or lower in 2019.
If you pay at least the amount suggested on your 2018 tax return, you won't be hit with a penalty, even if you earn significantly more this year. You can pay in less, but you should aim to pay at least 90% of what you believe you'll owe at year's end. If you owe more than $1,000 or 10% of your tax liability at the end of the year, the IRS will charge you a penalty. You can figure out how much this will be by filling out IRS Form 2210.
The estimated tax deadlines are usually the 15th of April, June, September, and January of the next year, unless one of those days falls on a weekend, in which case the deadline is extended until the next weekday. For 2019-2020, the deadlines are:
- April 15, 2019
- June 17, 2019
- Sept. 16, 2019
- Jan. 15, 2020
Make a note of these dates and set yourself a reminder on your phone or calendar so you remember to pay your quarterly taxes on time.
Familiarize yourself with the latest changes to the tax laws
Every year, the government tinkers with the tax laws a little. The tax brackets often change slightly, as do the value and qualifications required for some tax deductions and credits. You don't need to understand every single rule, but it's good to familiarize yourself with the key changes that could affect you in the coming year. For example, if you're now on the bubble between two tax brackets, you may want to contribute more to tax-deferred retirement savings or make some charitable contributions so that you stay within the lower tax bracket. This ensures you'll lose a smaller percentage of your income to the government. Here's a brief guide to the most important 2019 tax changes so you can be prepared.
Taxes will never be enjoyable, but with a little planning, they can be a lot easier. By taking these steps today, you'll be able to avoid any unpleasant surprises when you file your taxes in 2020.