Each tax season is different for each taxpayer. Some individuals always expect to owe the IRS money each year, and some always expect a refund of varying amounts. No matter how certain life seems year to year, there could be new adjustments or new credits available that could either negatively or positively impact your tax season.
Changes in life circumstances like marriage, divorce, a new job, or a new home could also be the cause of a surprise tax bill or refund. Lately, we’ve seen changes firsthand with the economic impact payments and child tax credit payments in 2020 and 2021. Luckily, no matter the sudden complications that occur during the tax season, there are ways to prepare and decrease the element of surprise you may experience.
Know About Credits from Your Decisions
Life choices can directly affect your tax outcomes. If you began to go to school this year, you could incur student loan interest deductions. The same can be said for those who paid for childcare, contributed to health savings, had, or adopted children, and more. These life choices can decrease your deductions and increase your credits, leaving you with a bigger chance to receive a refund instead of owing money.
Depending on each spouse’s income, filing jointly for the first time could prove to be beneficial for a couple. Couples with vast differences in income may find that their tax bracket changes just enough to benefit them financially. Consequently, couples with equally profitable income could be pushed into a tax bracket that will hurt them during the tax season when they file jointly.
Check your Withholdings
It’s never too late to check how much of your paycheck is being withheld for taxes. The more you withhold from your checks, the more you will get back during tax season. Reversely, if you don’t have enough money taken out of each of your paychecks, you will benefit in the short term with more “bring home” money, but you could owe it during the tax season.
One way or another, Uncle Sam will get his money! Make sure your withholdings are in a perfect sweet spot to receive enough money to pay bills, but not owe a large amount come tax time.
Prepare
You can review your tax decisions at any time of the year. When you’re self-employed, it’s recommended to pay taxes quarterly to keep the IRS off your tail in the long run. Full-time employees have the additional benefit of being able to better understand their annual income, which makes it easier to assume what the end-of-year earnings will be, the set tax bracket, and how much to pay to not be in the negative. You’re always able to review your taxes once something life-changing happens, like buying a house or winning a large lump sum of money.
Conclusion
Even when you plan very well, surprises can be unavoidable. Nevertheless, becoming knowledgeable of the possible year-to-year circumstances will help households prepare for any positive impacts and avoid the more negative ones.
