How to Prevent Owing Money on your Taxes Next Year
Here are several ways you can lower your tax liability and avoid owing money to the IRS next year.
Getting a large tax bill from Uncle Sam can derail your financial plans, especially if you were unprepared for the cost. There are several ways you can lower your tax liability and avoid owing money to the IRS next year. Please note that the information contained herein may not represent the views and opinions of Zions Bank or its affiliates and is intended for informational purposes. It is presented for general informational purposes only and does not constitute tax, legal, investment or business advice.
1. Adjust Your Tax Withholding
A certain amount of your paycheck is withheld each pay cycle to cover income taxes and payments into Social Security. In cases where you overpay, you receive a refund. But in instances where not enough is withheld, you may end up owing the IRS. If you find you owe taxes every year, obtain a W-4 form from your employer and increase your withholding amount. More will be taken out of your paycheck, but you may receive a refund during tax season instead of a bill.
2. Take Advantage of Deductions
Tax deductions make a significant difference in your liability, and each write-off you claim will lower your taxable income. The amount the deduction is worth relies on your federal tax bracket. For example, if you’re in a 25 percent tax bracket, and take a $1,000 deduction, your taxable income will be lowered by $250. There are dozens of deductions that you may qualify for, so working with a professional and keeping immaculate records of all your financial transactions during the year is crucial to claiming these write-offs.
For example, it pays to be charitable. Donating items to qualified organizations, or providing cash or noncash contributions can make a huge dent in your tax bill. You may also qualify for deductions ranging from mortgage interest and medical expenses to capital losses and financial services fees. If you contribute to a traditional IRA, your contributions are also tax deductible
3. Claim Tax Credits
Tax deductions work by lowering your taxable income, while tax credits lower your bill on a dollar-for-dollar basis. For example, if you claim a $1,000 tax credit, your tax bill will be lowered by $1,000 regardless of which tax bracket you fall into. In addition, some credits are refundable, meaning that you will receive that money as a refund even if you owe no federal income taxes. Similar to deductions, there are several tax credits in a number of categories. The most popular credits are those related to education, even if you are taking part-time classes for fun, as well as those for saving for retirement.