Tax planning for individuals doesn't have to be complicated or stressful, but it does have to be a part of your routine.  

I run a tax preparation business, so I know the value of reviewing tax withholding to make sure it matches your tax liability. But, others who aren't familar with taxes often don't know how to check if it's set up properly, instead hoping that their current withholding is good enough. They avoid investigating further, even if it ends up costing more.

However, as some people learned last April in the post-tax reform aftermath, maintaining the status quo doesn't always make sense. Remember, if you don't have to pay taxes and your tax return isn't significant, it means your withholding is correct.

The process to review withholding is simple, especially when you use the IRS' withholding calculator. So, don't put off this process any longer, and your finances will thank you.

1. Know your strategy.

What do you want out of your taxes, other than a smaller payment? If your spouse is self-employed, you may want to avoid the hassle of paying estimated quarterly taxes by withholding a bit extra. If you have an accountant who takes care of this automatically, perhaps that's not a priority for you. If you have an employer, the best strategy is not to withhold too much in the hopes of getting a large return. Make sure you're withholding only the correct amount, and your money will go further--especially if you choose to invest it!

2. Know yourself.

Yes, investing the extra cash you get each month from having your withholding correctly adjusted will benefit you. At the end of the year, you'll have had that money invested for a year longer than if you had waited to receive it in the form of a tax return.

However, be honest: will you do that? Many people won't notice the small amounts and will instead spend it. For those people, it's better to receive a lump sum after filing their taxes because the larger amount isn't so easy to fritter away. Getting one lump sum may be motivation to invest it in something that adds equity to your home, pads your savings, or helps you complete an important project. Keep your spending habits in mind when adjusting your withholding.  

3. Use the IRS withholding estimator to be sure.

The IRS has a withholding estimator that you can use, and it makes the process of withholding simpler. You don't have to supply any personally identifying information (meaning, it's anonymous), but you should have last year's tax documents at the ready so that you get the best estimate possible.

4. Make a habit of it.

Though it would be nice if a tax checkup were a one-and-done task, the reality is that most people would benefit from doing this yearly--or more frequently. Checking at the end of the year will help you understand if you are likely to owe taxes in 2020 (from your 2019 filing), and make estimated payments in advance. Checking again in January can help you prep for what you'll owe in 2020. Both are critical for financial planning purposes.

Remember: if your withholding was a bit less than it should have been, you should pay the estimated difference to avoid a surprisingly large tax bill or an underpayment penalty. You have to pay at least 90 percent of the tax you're liable for to avoid this penalty.

If you're not on the right track, make changes! You can download Form W-4 and submit it to your employer. The effort you make now can save you money in the long run.

Published on: Dec 12, 2019
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