Tax Planning Tips: Why You Need A Year Round Tax Planning

 Year-Round Tax Planning

Many individuals and companies, only worry about their tax in March and April. Cross their fingers for a large return. It sounds familiar, but this is not right from tax planning prospective.

By March and April, you might have taken few irreversible steps and those you cannot correct or reverse, as a result your tax might go up. 

Everyone should plan their taxes year-round. You still need to think about taxes even if you have already filed your tax return. The tax you might owe or the rebate you anticipate in April may be impacted by what you do right now.

• Identify your filing status

• Know your Adjusted Gross Income (AGI)

• Check your withholding.

• Save for your retirement

• Benefit from tax credits and deductions

• Harvest your Tax-loss.

• Organize your tax records

Identify your filing status

Your filing status is considered for calculating your tax liability, standard deduction, and eligibility for certain credits. If you qualify for more than one filing status, consult a tax practitioner to determine which one will result in the least amount of tax. Your tax situation, including your filing status and your eligibility to claim specific tax credits and deductions, may change because of changes to your family life, such as marriage, divorce, birth, and death.

Know your Adjusted Gross Income (AGI)

When calculating your taxes, your AGI and tax rate are crucial variables. Your total yearly income (TYI), less any adjustments or deductions from it, is your AGI. In general, your tax rate and the amount of tax you pay increase with your AGI. Making adjustments during the year that lower your AGI can be a part of tax planning.

Check your withholding.

Due to the pay-as-you-go nature of federal taxes, the majority of your tax will need to be paid throughout the year as you generate the money. When your personal or financial information changes, use the IRS Withholding Calculator to verify your withholding. If you want to modify the amount of tax deducted from your paycheck, provide your employer an amended Form W-4. Your AGI may decrease if your withholding is increased or changed, which could have an impact on your tax obligation or anticipated refund. Every year, as well as if your financial or personal position changes, think about submitting a new Form W-4.

Save for your retirement

Opportunities for retirement savings can also reduce your AGI. Your take-home income and AGI are both decreased when you make contributions to a retirement plan at work. One more strategy to save for retirement and reduce your taxable income is to make contributions to a regular IRA account.

Benefit from tax credits and deductions

Any qualifying deductions from your AGI, including your standard deduction, must first be subtracted in order to determine your remaining taxable income. When you deduct tax credits from the amount of tax you owe, your tax is reduced. Your whole financial planning can benefit from tax planning. To make the filing season for you and your family less "taxing" the following year, start making plans now to uncover tax savings throughout the year.

Harvest your Tax-loss

Underperforming investments can be sold, exchanged for reasonably comparable investments, and the proceeds used to offset genuine investment gains. Tax-loss harvesting is the term for this procedure. As a result, less of your money might end up going to taxes and more might continue to be invested and generate income for you.

Organize your tax records

Create a system to keep all of your crucial information in one place. For electronic recordkeeping, you can either use a software application or labeled file cabinets to maintain paper records. As you receive tax records throughout the year, add them to your folders. It will be simpler to prepare your return if you have easy access to your data, and you might find deductions or credits that you might have missed. Whenever your address changes, let the IRS know. If your legal name changes, notify the Social Security Administration right once to prevent a holdup in the preparation of your tax return.

Tax Planning Tips: Avoid Underpayment Tax Penalty With Withholding Tax OR By Paying Estimated Tax

What is Estimated Tax?

1. Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

2. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

3. Visit WWW.IRS.GOV to calculate estimated tax due by using IRS Withholding Tax Estimator. 

4. Refer Publication 505, Tax Withholding and Estimated Tax.

5. For estimated tax purposes, the year is divided into four payment periods. You may send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone or from your mobile device using the IRS2Go app. Visit IRS.gov/payments to view all the options. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax.

6. However You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.

• You had no tax liability for the prior year

• You were a U.S. citizen or resident for the whole year

• Your prior tax year covered a 12-month period

How you can avoid Underpayment Penalty?

1. Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

2. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

3. Visit WWW.IRS.GOV to calculate estimated tax due by using IRS Withholding Tax Estimator. 

4. Refer Publication 505, Tax Withholding and Estimated Tax.

5. For estimated tax purposes, the year is divided into four payment periods. You may send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone or from your mobile device using the IRS2Go app. Visit IRS.gov/payments to view all the options. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax.

6. However You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.

• You had no tax liability for the prior year

• You were a U.S. citizen or resident for the whole year

• Your prior tax year covered a 12-month period

Once you determined  estimated tax, ensure that your withholding tax + previous estimated tax payment is ¼th of estimated tax by Apr 15, ½ of estimated tax by Jun 15, ¾ of estimated tax by Sep 15 and 100 % of estimated tax by Jan 15 (Next Year)

What is Underpayment Penalty?

1. If your tax due due is more than as stated in previous slide, then you are liable for underpayment of estimated tax. 

2. If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. 

3. The Underpayment of Estimated Tax by Individuals Interest / Penalty applies to individuals, estates and trusts if you don't pay enough estimated tax on your income or you pay it late. The penalty may apply even if we owe you a refund.

1. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers,  fishermen, and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information. 

2. The penalty may also be waived if:

1. The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or

2. You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

3. Taxpayers can use following forms to adjust their withholding tax by submitting following forms to the payer.

   • W-4 Employee's Withholding Certificate

   • W-4P Withholding Certificate for Periodic Pension or Annuity Payments

   • W-4R Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions

   • W-4S Request for Federal Income Tax Withholding From Sick Pay

   • W-4V Voluntary Withholding Request

   When you need to Adjust Your Withholding Tax?

Following changes  will result current withholding less than your tax liability. 

• Change of lifestyle: 

1. Marriage

2. Divorce

3. Birth or adoption of child

4. Purchase of a new home

5. Retirement

6. Filing chapter 11 bankruptcy

• Change of wage income

1. You or your spouse start or stop working, or start or stop a second job

• Change in the amount of taxable income not subject to withholding

1. Interest income

2. Dividends

3. Capital gains

4. Self-employment income

5. IRA (including certain Roth IRA) distributions

• Change in the amount of adjustments to income 

1. IRA deduction

2. Student loan interest

3. deduction

4. Alimony expense

• Change in the amount of itemized deductions or tax credits

1. Medical expenses

2. Taxes

3. Interest expense

4. Gifts to charity

5. Dependent care expenses

6. Education credit

7. Child tax credit

8. Earned income credit

Education Saving, Expenses and Tax Implication

• Coverdell Education Savings Accounts [ESA] are trust or custodial accounts designed solely for the purpose of paying the trust beneficiary's qualifying education expenses.

• Series EE and series I bonds interest tax free, if you pay qualified educational expenses.

• Education Credits: Taxpayers can take advantage of two comparable tax credits to help defray part of the costs of higher education. They are known as the American opportunity credit—formerly the "Hope" credit—and the lifetime learning credit, and they are similar in some ways and dissimilar in others.

• Scholarships, fellowships, need-based education grants, eligible tuition reductions, as well as student loan cancellations and repayment aid, are all possible tax-free options for taxpayers.

• Taxable or tax-free tuition reductions are possible. A tax-free tuition decrease is referred to as a qualifying tuition reduction. If a tuition reduction is taxable, the taxpayer is viewed as receiving a payment in the amount of the tuition reduction and paying it to the educational institution on the student's behalf.

• Taxpayers can take a special deduction of up to $2,500 for interest paid on student loans used to pay for higher education costs. The interest on student loans is deducted as an adjustment to income, thus the deduction is available regardless of whether the person itemizes deductions.

Dirvorce, Separation and Taxation

The change in a person's relationship status, such as a legal separation or divorce, has an impact on their tax situation. For tax reasons, a couple is considered married until they receive a final decree of divorce or separate maintenance.

• When a person is divorced or separated from their spouse, they usually need to file a new Form W-4 with their employer to claim the proper withholding.

• Amounts paid to a spouse or a former spouse under a divorce decree, a separate maintenance decree, or a written separation agreement may be alimony or separate maintenance payments for federal tax purposes.

• For federal tax reasons, alimony or separate maintenance payments made to a spouse or former spouse under a divorce decree, a separate maintenance decree, or a signed separation agreement may be considered alimony or separate maintenance payments.

• A parent who has custody of a child can generally claim that child on their tax return. If parents share custody 50/50 but don't file a joint return, they'll have to pick who gets to claim the child.

• When property is transferred between couples, or between former spouses if the transfer is due to a divorce, there is usually no acknowledged gain or loss. It's possible that the transaction will need to be reported on a gift tax return.

• Divorcing couples who are still married at the end of the year are treated as married for the purposes of determining their filing status for the year. The IRS.gov tool What Is My Filing Status can assist users in determining which filing status is appropriate for their scenario.

Taxpayers should check their federal withholding to decide if they need to give their employer a new W-4

Source : IRS 

The IRS encourages all taxpayers to review their federal withholding at least once a year to make sure they're not having too little or too much tax withheld.

Taxpayers whose employers withhold federal income tax from their paycheck can use the IRS Tax Withholding Estimator to help decide if they should make a change to their withholding. This online tool guides users, step-by-step through the process of checking their withholding, and provides recommendations to help aim for the withholding amount that's right for them.

Taxpayers should check with their employer to update their withholding or submit a new Form W-4, Employee's Withholding Certificate.

Adjustments to withholding
Individuals should generally increase withholding if they hold more than one job at a time or have income from sources not subject to withholding. If they don't make any changes, they will likely owe additional tax and possibly penalties when filing their tax return.

Individuals should generally decrease their withholding if they qualify for income tax credits or deductions other than the basic standard deduction.

Either way, those who need to adjust their withholding must submit the new W-4 information to their employer as soon as possible since withholding occurs throughout the year.

Individuals who should check their withholding include those:

• who are working two or more jobs at the same time or who only work for part of the year
• who claim credits such as the child tax credit
• with dependents age 17 or older
• who itemized deductions on prior year returns
• with large tax refunds or large tax bills for the previous tax year

Reasons to use the Tax Withholding Estimator
The IRS Tax Withholding Estimator can help taxpayers:

• Estimate their federal income tax withholding
• See how their refund, take-home pay or tax due are affected by withholding amount
• Choose an estimated withholding amount that works for them

Individuals who should not use the Tax Withholding Estimator are those:

Who have a pension but not a job. Form W-4P, Withholding Certificate for Pension or Annuity Payments, should be used to estimate this tax withholding.
Who have nonresident alien status. These individuals should use Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens.
Whose tax situation is complex. This includes alternative minimum tax, long-term capital gains or qualified dividends.

Taxpayers should prepare before using the Tax Withholding Estimator by having pay statements for all jobs, information for other income sources and their most recent income tax return. The tool does not ask for sensitive information such as name, Social Security number, address, or bank account numbers.

More information:
Publication 505, Tax Withholding and Estimated Tax

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Quarterly Estimated Tax Payments & Overseas Filing Deadlines - Reminder

Quarterly Estimated Tax Payments & Overseas Filing Deadlines - Reminder

If you are making quarterly estimated tax payments to the IRS, the due date for the April 1 – May 31 quarter of the year is June 15th, 2022.
If you are a U.S Citizen or Green Card Holder living abroad or in active military service and have not filed your taxes yet, the deadline is also on June 15th.
For payments made using IRS Direct Pay, you can make payments until 8PM EST, and for payments using a credit or debit card, payments can be made up to midnight on the due date.