We’ve all been there: you finally do your taxes and womp, womp…you owe more than you thought. There goes that vacation/new purse/new fridge I was planning.
Or worse: Where am I going to get another $2k?
As April 18th draws near, tax season is almost done. Some of you are still working on them, and to be honest—that’s totally okay! Sometimes there are unexpected complications; some years you’re working on it down to the wire, and other times, you’re just busy. There’s always next year to be better prepared, and today, I want to share a couple of tips on how to get ahead for 2022 taxes.
Did you owe on your taxes this year?
I’ve heard too many stories of people who owe more than they anticipated and the bind they’re placed in as a result. Some of the most common reasons for owing money on your taxes include:
- Inheritance: You received money from someone who passed away. Depending on the type of account, it could be considered income to you on your 1040.
- Bonus at work: Congratulations! You made more income. In doing so, you now have an increase in taxes and maybe a new tax bracket. You may not have had enough withholding taken out for this new scenario.
- Cryptocurrency: The IRS considers all forms of cryptocurrencies as assets, similar to property. You may have to pay taxes on any profits in the same way you would with stocks and bonds.
- Withdrew money from a retirement account: Depending on what type of account, there could be a penalty, and the distribution could be considered income.
Got a tax refund back?
If you’re one of the surprised few who actually gets money back during tax season, here are a few reasons why you may have received a larger refund than expected:
- Withholding too much from your paychecks
- COVID benefits (2021 only)
- Child tax credits
If you do get money back this year, I’m happy for you and hope you spend it wisely. However, it’s important to remember that a tax refund is money you should have had earlier in the year.
A tax refund is just the government giving you your own money back.
Your employer withholds an amount from your paycheck and gives it to the government. If too much is withheld then it comes back to you later in a refund. Unless you want to loan the government your own money free of interest every year (that’s what a tax refund is!), the golden rule for taxes is that you want to owe nothing and get nothing back on your refund. Break even!
What to do if you owed money OR got a refund:
If you owed or received a large refund, I would encourage you to go to your HR department and change your withholding status. If you owed money, consider withholding a bit more out of each paycheck. If you got a refund, consider reducing your withholdings and setting aside the resulting increase in your paycheck for a vacation or extra savings for that bigger purchase. You are in control at that point, and can make some of your own choices.
What you should do right now to get prepared for next year’s taxes:
Let’s face it: there’s no easy way around taxes. They’re complicated.
My advice: don’t do it all at once next January or February when you get your W-2 in the mail. Start now.
Look at your W-4s.
Pay attention throughout the year.
Keep track of cryptocurrency transactions.
Make a plan for where your money is going.
Remember your intentions and what you ultimately want to do, then designate accounts or at least a path for where your money is going.
Here are some examples:
Self-employed: You should be making quarterly estimates and verify you are sending in the correct amount. At the very least use an accounting subscription such as Quickbooks. Consider a bookkeeper; they’re great for keeping you organized, and your taxes will be so much easier.
Receive bonuses: If you receive bonuses throughout the year, I would recommend setting up a separate savings account strictly for taxes. Put some money aside each month into this account for your taxes, or you could do quarterly estimates. It can also serve as a way to set aside some cash for tax time if you didn’t have enough withheld from your paychecks.
Military: If you or your spouse, are in the military, there are tax benefits to consider, such as state residency. As parents, it can be a great opportunity to connect with your children and get them thinking about their taxes. I have over 12 years of experience in military taxes and would love to help!
Remember: when you receive money outside your normal income, stop and check.
What type of account is this coming from?
Then ask for some guidance.
Don’t just spend it or liquidate an account. There could be some unexpected consequences that could really be painful financially. This month is the best time to start planning your taxes for next year, and I’d love to help you get organized so you can be prepared.
The opinions expressed herein are those of Anna Nelson and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements cannot be guaranteed. This document may contain certain information that constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “expect,” “will,” “hope,” “forecast,” “intend,” “target,” “believe,” and/or comparable terminology. No assurance, representation, or warranty is made by any person that any of Anna Nelson assumptions, expectations, objectives, and/or goals will be achieved. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. Anna Nelson is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.