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The Best Time to Prepare for the Tax Season              

Death and taxes, two things we can all be assured of in this world.  One of the biggest mistakes that people make is that they don’t start thinking about their taxes until the end of the year rolls around, or when the tax season kicks in.  But, the optimal time to start working on your taxes is during the very beginning of the previous year.

When you prepare for your taxes at the beginning of the previous year - which is the year that you’ll actually be taxed for - you increase the probability that you won’t have any surprise tax obligation shortages or you haven’t severely overcommitted funds you could have been investing towards taxes.

At the beginning of the year, analyze your first two paycheck’s gross salary and tax deductions.  Look at the current withholding allowance that you have on file and ensure that your withholding rate is correct.  If you are married and file jointly, ask your spouse for their first two paychecks of the new year so that you estimate how much money you will make this year and how much money you will pay in taxes.  If you have multiple streams of income (second job, side hustles, rental income not claimed on a separate tax filing) you will need to factor these incomes and tax payments into your numbers as well.  I’d recommend creating a spreadsheet or some automation tool that will allow you to calculate your projections.  Then, be on the lookout for the updated tax table for the tax year in question.  Look for your tax bracket, based on your projects, to find out what your tax obligations may be.  Now, if you have some tax write-offs such as real property, child tax credits, and securities and equities losses, you will need to figure out a means to project what these may be.  This may involve waiting for receipts from day care centers and plugging them into your calculations, using previous year’s write-offs and adjusting for the new year, or a combination of the two techniques.  Then, based on these calculations, you should be able to come up with a general idea of what your tax obligations will be and you can respond by either adjusting your withholding allotments or having a specific dollar amount going to your taxes.

Everyone’s financial situations and assets will differ so there may be some tailoring necessary to the aforesaid information above.  You know your financial situation; thus, only you can add the necessary level of specificity to your financial situation as it pertains to taxes.  But, if you start early, and continually manage this process throughout the year, you can minimize the risk of either owing more than what you anticipated paying, paying too much money into taxes that could have been redirected towards personal investments.

Note: I am not a certified public accountant or financial planner.  Consult with a CPA, CFP or your state and federal government taxation agency for optimal tax compliance.






 
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