How to Plan for Taxes Throughout the Year

by Matt Casadona
How to Plan for Taxes Throughout the Year photo

Does a looming tax deadline get you in a panic each year as you frantically search for all of your tax documents? Take these steps to plan for taxes throughout the year and make tax filing a painless process.

Tax season is probably everyone’s least favorite season, especially if you’re a business owner. Unfortunately, just like work-from-home burnout, taxes are a necessary evil. While filing taxes is easy for regular employees, those who run businesses or freelance must keep detailed records of their profits and losses.

Planning for taxes throughout the year can help you get a better handle on your finances while making tax time less stressful. It can also help you save money and make your business recession-proof. Here’s how you can start tax planning right now.

Understand Your Tax Bracket

If you live in the US, you might be familiar with the progressive tax system that includes brackets. This system means people with higher taxable income will be subject to higher tax rates. The seven federal income tax brackets are:

  • 10%
  • 12%
  • 22%
  • 24%
  • 32%
  • 35%
  • 37%

No matter which bracket you’re in, you will likely not pay that rate on your entire income. Reasons for this include deduction or the government dividing your income into chunks.

For example, if you make $30,000 per year, you won’t multiply your income by 12%. Instead, you’d pay 10% on the first $9,875 and 12% on the rest. This can be confusing, so if you’d like more information, you can contact a CPA to help you grasp a better understanding of where you fall and how much you’ll pay in taxes.

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Understand Tax Credits Versus Tax Deductions

Tax deductions and credits mean you’ll pay less than you think on your taxes. However, they’re not the same thing. Tax deductions are types of expenses that the IRS allows you to subtract from your taxable income. Tax credits give you a dollar-for-dollar deduction on your tax bill. If you get a tax credit for $5,000, your tax bill will be lowered by $5,000.

Be Aware of Possible Deductions and Credits

Now that you know the difference between deductions and credits, you’ll need to know which ones you qualify for. There are tons of them, from an adoption credit and childcare credit to residential energy tax credits. You can use professional tax software to help you determine which ones you’re eligible for come tax time.

Keep Records

Keeping tax returns and the documents used to complete them isn’t required, but it’s strongly recommended. These documents will come in handy if you’re ever audited. The IRS has three years to determine whether an audit is necessary, so you should keep these records for a minimum of three years.

The types of records and documents you’ll want to keep are:

  • Income, including W-2s, bank statements, and 1099s.
  • Expenses and Deductions
  • Home, including property tax assessments and insurance records
  • Retirement Accounts
  • Any Additional Investments, such as sale receipts and annual statements

Strategies to Cut Your Tax Bill

Deductions and credits can help you keep your tax bill low, but you can also use other strategies to help you keep your money, including:

Amend your W-4

If you’re an employee, you can change your W-4 at any point. This form, provided by the IRS, tells your employer how much money to withhold from each paycheck. The more allowances you claim on a W-4, the less money will be taken out for taxes. If you claim fewer allowances, you should see more money in your check.

Get a 401(k)

If available, get a 401(k) through your employee so that you can get a tax break on the money you save for retirement. The IRS doesn’t tax what you put into your account from your paycheck, and you can add up to $19,500 per year into the account.

Believe it or not, self-employed individuals may also qualify for their own 401(k)s, so if you own a business, this could be something to look at to save on your next tax bill.

Put Money Into an IRA

IRAs are another type of retirement savings account that allows you to set aside money for your future. Your contributions are typically tax-deductible, but how much you deduct depends on your spouse and their retirement plan, along with your income. You’ll pay taxes on this money if you make withdrawals before retiring.

Save Money Throughout the Year

Saving money throughout the year ensures that you’ll have enough to cover your tax bill. Those who are self-employed should try to save 30% of their income for taxes to ensure that they have enough to cover both quarterly payments and annual taxes. To easily set aside money, set goals for yourself throughout the year. These goals can be quarterly as well, to tie in with your quarterly taxes.

For example, if you know that you’ll owe quarterly taxes on June 15, make sure that you’ll have at least 30% of what you made that quarter to cover it. You can choose to save 30% from every paid invoice, or you can choose to save a certain amount each month.

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Know When Taxes Are Due

If you’re a regular employee, then you already know that you must file your taxes before April 15 every single year. This is fairly easy to do online, especially for those who only have a W-2 that was given by their employer.

If you’re a business owner, however, you’ll have to pay quarterly and annual taxes every single year. To make sure that you pay on time and avoid any late fees, you should know exactly when they’re due. The quarterly deadlines are:

  • April 15
  • June 15
  • September 15
  • January 15 of the next year

Failing to pay on time can result in high fees. If you know your business finances are a mess and you’re not sure how much to pay each quarter, you can use tax software or hire a professional CPA, to help you know what and when to pay.

Tax Planning

Planning for your taxes is easy, so you shouldn’t be in a panic the night before trying to find all the important documents. There’s no reason not to plan ahead for your taxes as this will ensure you file them on time.

Reviewed July 2021

About the Author

Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, traveling, and music.

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