Now that Tax Season Is Over, It’s Time to … Think about Taxes?

 CPA Chris Morris offers 5 indispensable tips for estimating next year’s taxes.

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Tax day is over. That dreaded moment when you might have to pay the government for the privilege of being in the great old United States of America. Or perhaps that glorious moment when you discover you have an unexpected nest egg, courtesy of the Internal Revenue Service.

Now you can relax, until next April. But should you?

I am certainly biased here, because I am a CPA specializing in taxes and accounting services for individuals and entrepreneurs, but I think forgetting about taxes until the calendar year turns is a huge mistake. By taking no more than an hour considering this past year’s taxes, you can radically improve your situation for the future.

Let’s not forget something—if you got a huge tax refund, what really happened was that you lent the government some money for the year, and they didn’t even have to pay interest. So while you think it’s a sweet deal for you to get a few thousands bucks back, the IRS is just as happy to keep your money for up to 11 months for free. In reality, the ideal situation is to neither owe nor get a refund.

With this goal in mind, here are five steps you can take to better estimate your taxes for 2016:

1. Take a close look at 2015’s tax return.

If you received a large refund, what was the reason for the refund? It could be that you simply contributed too much from your paycheck. Maybe you never changed your withholdings when you became a family. Or it could be that you started school and became eligible for some new tax breaks. No matter the reason, understanding why you got a refund will help you to figure out what you might want to change in the current year.

You should do the same if you owed money. There are any number of events that could trigger a bigger tax bill. If you are earning more than in the past, you could be in a new tax bracket and owe a greater percentage of your income to the IRS as a result. Perhaps one of your children is not a dependent any more, or you are now divorced and get a smaller exemption because of it. But you want to know what caused the tax bill.

2. Consider changing your withholdings.

Whether you owed or got a refund, the easiest adjustment to make is to change your tax withholdings. This will either increase or decrease the amount of money pulled out from each paycheck, with the end goal of equalizing your estimated payments against what is actually due at tax time.

Generally, if you use the worksheet provided with the W-4 you will be able to arrive at the correct number of exemptions to take on your taxes. Most people don’t even consider using this worksheet, either because it’s confusing or because they are afraid to owe even more money. But trust me as an expert when I tell you that using the worksheet is pretty straightforward and will be incredibly helpful.

3. Decide if you should be making quarterly payments.

Whether you did your own taxes or took them to someone to have them done, you should have received a notification that you need to pay quarterly taxes if it’s applicable. This seems really simple, but if you received one of those notices, then you should do what it says. Filing quarterly payments for taxes is another step that tends to unnecessarily create concern or fear. The truth is that you just treat it as another bill, and drop a check in the mail four times a year.

If you owed more than $1,000 but didn’t get a notice of quarterly payments, then a mistake was made somewhere. You should be paying quarterly. If this is you, it might make sense to reach out to a tax professional and ask for help. If you are a DIY kind of guy, you can Google “1040-ES” and figure it out as well.

4. Take advantage of every local and state tax credit.

So many of my clients miss perfectly simple opportunities to take advantage of a tax credit, just because they don’t know these credits exist. Let me give you a simple example. In my home state of Arizona, you can contribute up to $200 ($400 if you are married) each tax year to a school district and have your taxes reduced by that same amount. In other words, you can give to a school and have it cost you nothing. What a deal, right?

It seems like every state and local government has some type of quirky law like that. With just a little research, or with a well-informed tax professional, the odds are good that you can find something similar in your hometown. But, you would need to know about it before the end of the year to take advantage of it. So start now!

5. Consider a free consultation with a CPA.

Again, make sure you recognize my bias here. I am a CPA, and I do offer free consultations. This is not a hard sell for you to talk to me, though. Rather, it’s a pitch for you to talk to a CPA you trust or want to trust.

Most people aren’t aware of the magnitude of the difference between a CPA and a tax preparer that you might see in your local grocery store next February. Your average tax preparer has had around two months of training, mostly on the software they will be using to prepare taxes. This is the same software you would find and use yourself, or at least very similar. A CPA, on the other hand, has had at least 25 college-level classes on all aspects of tax, accounting, and business operations. In addition, we are required to take classes every year to learn about new laws in the tax code.

In other words, a CPA is more informed. If you schedule a free consult with one and bring last year’s taxes, there is a good chance you will learn something new.

I hope you consider all or at least some of these options. Otherwise, come April 2017, you might be disappointed (or elated) once again. And the opportunity to even out your taxes will have been missed.

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Photo: Getty

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