It is time to start planning for the future and the future of your taxes is in about 240 days. That is when the IRS is expected to start processing 2014 tax returns (assuming no late tax legislation changes or other IRS delays) and you will be able to file your taxes and receive your refund.
It is just starting to be summer time so why are we talking about taxes and more importantly why should you even care? There is plenty of time before you can file your tax return and even more time before April 15, 2015, when you have to file. Let's look at a few great reasons to think about your taxes right now.
One of the great reasons to think about your taxes right now, or more specifically at the end of June, is EASY MATH. The easy math part is simply that at the end of June the tax year is half over. This makes doing a simple mid-year income tax return projection as easy as taking your current year information and doubling it. This works regardless of your level of income. Take your June 30 paystub, or your net profit to date if self-employed, and multiply it by two. This method assumes that you have no other big events coming and that the first half of the year is a good prediction for the second half. Next step, do the same for your federal income tax withholdings on your paystub, take your federal income tax withholding year to date and multiply by two. If self-employed and you should have made two estimates by June 30 - double that. Now you have a projection for your 2014 income and 2014 withholdings or estimates paid in. Finally, for this simple and fast projection, dig out last year's tax return, look it over and compare to your current estimated deductions. You can either take a sheet of paper, create an elaborate excel spreadsheet or simply write in the left side margins of that 2013 tax return your 2014 projected amounts to see where you are. To determine your estimated tax liability, you can either use the 2013 tax tables or the current year 2014 tax rates in the 2014 1040-ES, Estimated Tax For Individuals, instructions.
Once you have estimated your income, deductions and taxes for 2014 simply compare to your projected federal income taxes withheld or estimated tax payments for the year. The rest is simply the projection of your refund in 240 days or the amount you may owe when you file year taxes.
You can do this mid-year estimate as detailed or as rough as you like, but do one or the other. The true benefit of the mid-year review is to get you to start thinking about your taxes and avoid surprises.
The other great news is that with about half the year remaining, you can do other planning to even further improve your tax position and lower your balance due or increase your tax refund. Currently time and the calendar are your friends. Soon they will not be.
Planning elements that you should consider:
Review your pension plan contributions. Are you taking advantage of your employer match? Will you have enough to live comfortably in your retirement? Too often, we allow the company to set the minimum required contribution to the retirement plan when we are hired and we don't review and update the contribution limits later. These minimum requirements don't always take into consideration the employer's matching contribution and we are often leaving free money for our future on the table. If you do nothing else with your company sponsored retirement plan, be sure to make your contribution equal to the maximum employer match; if your employer matches your contribution amount up to 5 percent of your salary, make sure your contribution amount is 5 percent of your salary. If you are already at your employer's matching contribution level, consider increasing your contribution amount. Even a one percent increase in your contribution will reduce your taxable income now and increase the amount of money available during your retirement. Not only will you reduce your taxable income and the amount of contribution is not included in taxable income on your W-2, there is a potential federal tax credit (the Saver's credit) of up to $1,000 for your contribution. One of the few times the IRS allows you to claim two tax benefits for the same money.
Have you had, or do you expect to have, any life changes this year? Life changes such as getting married, having or adopting a child, sending your child off to college, moving mom or dad in with you or even retiring can have a profound effect on your tax return. Some of them can reduce your taxes and increase your refund while others can increase your taxes. List your life changes and review them with your tax pro so you can adjust your tax withholdings if needed.
It is never too early to get organized by gathering all your potential deductions you have to date. If you have given used clothing, furnishings, household goods, even a vehicle to charities already, make sure you take the time to list what you gave, the condition of the items, the cost of the item, and the fair market value of the item when you donated it. Keep the list with your receipt from the organization so you aren't trying to gather the information at tax time. Make sure you are keeping the receipts for any other potential tax deductions, such as medical expenses, miles driven for medical purposes, employment related unreimbursed expenses and your business mileage log.
Be prepared for potential late year tax law changes and other tax return dynamics for the 2015 filing season. Many popular tax breaks currently are no longer available as of December 31, 2013. They include the sales tax deduction for itemizers, the Educator expense deduction for teachers, the tuition and fees deduction for taxpayers not eligible for the education credits, and even the energy credit for making energy efficient home improvements, just to name a few. They all expired at the end of 2013. While the deductions and credits are popular with taxpayers, Congress is still undecided whether they will be extending the provisions again, changing them in some fashion or letting them stay expired, so pay close attention to potential tax changes under consideration especially IF they impact you.
Doing a mid-year tax projection is not an exact science, nor does it have to be time consuming taking hours, days and a weekend. You should be able to locate your information and do most of the basics in a couple of hours. By doing so you will have a better feel for where you are financially and be able to plan better accordingly. Keep in mind this final tax observation. If your current year (2014) is very similar to your last year earnings year (2013), and not much else has changed, then your tax outcome should be very similar. If refund last year, then probably refund this year -- if owed last year, probably owe this year. If your projection shows otherwise, be sure you understand why, and if you are expecting changes to your tax profile or have them already, use this mid-year projection to know what it means to your bottom line. If you need additional help, locate your favorite tax person and ask some questions. If they are not there or are unwilling to help out, and by help out I mean some free guidance and answers to a question or two, then you might be in the market for a new tax relationship. Take some steps for your financial security by making some time for it and getting some help if you need it. Keep more of your money -- it is your money, after all.