A large tax bill can be a minor annoyance or a huge financial burden, depending on your financial situation. No matter your financial situation, there are ways to cut down on the amount you’ll pay at tax time. The more prepared you are throughout the year, the better you’ll fare when filing. Here are some things you can do throughout the year to make sure that you are prepared for when you file your taxes and so that you don't have a large bill.
If you are paying more than you expected this tax season, the main culprit is your withholding amount. Consider increasing your withholding amount throughout the year so you’ll owe the IRS a smaller lump sum at tax time. On the flip side, if you’re getting a huge refund, you still might need to tweak your withholdings. You could be better off having that money at hand throughout the year instead of getting it all back at one time. If you're wondering what to do right now, ask your HR department for a W-4 withholding. (For related reading, see: Cut Your Tax Bill.)
Filing as single will withhold more than if you file as married. You have the ability to change your filing status no matter if you’re married or not or how many people are in your household.
Report Life Changes
If you got married and both spouses work, you could receive a bonus or penalty based on how much you’re withholding. If you had a baby, you’ll be gaining an additional dependent and possibly the child tax credit. Talk to your employer and make sure your W-4 form reflects those life changes. You could be eligible for tax breaks and deductions that you’re missing out on if you don’t make those adjustments. Here are some life changes that could affect your withholdings:
- Marriage or divorce
- Birth or adoption
- Home purchase
- Change in income or job situation
- Change in itemized deductions
Consider Tax-Free Investments
There are some ways to invest your money that will allow it to accumulate without being subject to taxes. For example, bonds, Health Savings Accounts (HSA) and tuition savings plan are tax exempt. Consider those options if you want to invest without growing your tax bill.
Contribute More to Retirement Savings
Identify where you are saving and see if you’re missing any available saving options. One way you can start increasing savings now is to put more toward your retirement savings. The money you invest in your 401(k) and other retirement accounts may help you cut down on your tax bill at tax time. Any money you contribute to your 401(k) does not count toward your taxable income, so it’s a great way to invest while lowering your bill. You can also contribute to your individual retirement account (IRA) to further reduce taxable income.
Don’t worry if you didn’t add much to an IRA before December 31 - you have until the day you file to add money that counts for your 2017 taxes. Also, make sure that you contribute to your IRA or HSA before you file your taxes.
Verify You’re Getting Tax Breaks
If you’ve missed some year-end opportunities to decrease your tax bill in other ways, deductions are an easy way to instantly cut down on what you’ll owe. These are some of the most easily missed deductions, but there are countless others you could be eligible for. Take some time every year to do some research or meet with a qualified professional to verify that you’re receiving all the deductions you should have. (For related reading, see: 10 Most Overlooked Tax Deductions.)