Have You Paid Sufficient Taxes for The Year?
“The More You Know, The More You Realize You Don’t Know“
-Aristotle-
Check your year-to-date withholdings.
- Did you have sufficient taxes withheld so far and are you on track with paying sufficient taxes for your filing status? If you experienced any life changes throughout the year that may have the propensity to impact your tax outcome, with the remaining two (2) months to year end, now is the time to make evaluations.
- A good place to start is with your Form W-4. For example, you started off the year claiming an exemption for a dependent, who then has aged out by year end. While you may have benefitted from lower withholdings per paycheck (higher take home pay), if you are unable to make that head of household claim when you file your tax return, that can result in a tax liability.
Did you earn additional income from self-employment or the gig economy?
- With a tight economy, many are picking up extra income in order to make ends meet. Since the pandemic, there has been a rise in what we often call “side hustles” or “gigs”. What is often confusing for first timers to the gig economy, is the fact that the income generated from it is considered self-employment earnings. The IRS requires self-employment earnings to be reported on Schedule C when the tax return is filed.
- One strategy is to have extra taxes withheld from your main job to cover the additional tax liability. Another option is to submit quarterly estimated taxes, as you earn the extra income. This can be done directly through your online IRS account. Since the tax system functions as “pay as you earn”, you can be assessed a late payment penalty if you were required to pay estimated taxes and did not do so.
Other Year-end Tax Planning Strategies.
Have you ever considered making contributions to a 529 Savings Plan? This is a great way to invest in the college education of your child. Now, keep in mind that this is not limited to your child(ren) but grandparents or other relatives can set-up and contribute to a plan as well, as long as he or she is a U.S. citizen or resident alien. There are some key things to consider before investing so it is advised that research the advantages and disadvantages of each plan type.
In addition to facilitating or funding the college education of your future student, you benefit from a tax deduction on your state tax return. If the funds are used for qualified education expenses at an eligible institution, the student can enjoy the benefit of tax-free withdrawals to pay for their college education. One important fact to note is that the contributions are not eligible for a federal tax deduction, only deductible on the state return. (Visit your state’s website to learn more.)
Here are a few resources to consider before investing in a 529 Plan and learn about other options such as the Coverdell Education Savings Account (ESA)
- Charles Schwab “ 529 Plan: A College-Savings Vehicle
- Saving For College “What Are The Pros and Cons of Using a 529 Plan?
SLS Accounting & Business Consulting Services is your one-stop shop for Bookkeeping, Business Advisory and Tax Services. I will work with you from the planning phase and lead you to a smooth financial operation. Your time can be devoted to serving your customers and keeping up with their demands, without you having to crunch numbers and worry about paying taxes. Grow and scale with a winning strategy for sustainability.
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