I’m not talking about going to the doctor, but that wouldn’t be a bad idea either. I’m talking about analyzing your tax situation to see if anything needs to be changed before you get started on the second half of 2011. We are almost halfway through the year so it’s a good time to analyze your withholdings, estimated tax payments and any changes to your life or employment that will affect your tax situation for the year. Life changes that can affect your tax liability are marriage, divorce, birth or adoption of a child, retirement, change in income, home purchase….just to name a few. You may need to adjust your withholdings, either up or down, to account for some of these changes.
If you’re self-employed or expect to have any 1099 income, you may be required to make quarterly estimated tax payments. And don’t forget the dreaded self-employment tax which is often overlooked by folks when doing their tax planning. When you are paid W-2 income, your employer pays half of your Social Security & Medicare tax, but when you are self-employed you are responsible for the entire 15.3%. Fortunately for 2011, the 2010 Tax Relief Act reduced the self-employment tax by 2% so the total is only 13.3%. Also you can deduct half of your self-employment tax in figuring your adjusted gross income.
Tax planning isn’t only to ensure you have paid enough in taxes and don’t owe too much at the end of the year. It can be used as a tool to make sure you haven’t paid too much in taxes as well. Some folks prefer to get a large tax refund at the end of the year but that is not really ideal. You are simply lending money to the government free of interest. By increasing your allowances on your W-4 (and NC-4, for folks in North Carolina) you can have less tax withheld from your paycheck and you can use that money for something now, rather than later. The ideal situation would be to break even on your end-of-year tax bill.
It’s a lot less stressful preparing for tax season when you know you’ve been on top of your taxes all year long. Tax laws and provisions are always changing and your tax professional can help you keep abreast of how those changes may affect your situation. Don’t wait until the end of the year when it’s too late to make any changes and don’t let yourself be surprised when you’re ready to file. You may end up with a not-so-pleasant surprise in the form of a large tax bill. Even worse is if you could have avoided some of that tax with proper tax planning.