What You Should Do Now to Prepare for Next Year’s Income Tax Return
Many people were concerned that changes to the tax laws meant that they would get a lower tax refund than in years past. Luckily, most people found that not to be true. The 2019 average tax refund was comparable to past years for most people. That said, not everyone was happy with their refund.
So what should you do if your refund was smaller than you expected? Even if you got the same amount back this year as last year, it might be nice to get back more next year, right? Here are some things that you can start doing today to prepare for the maximum refund on your income tax return next year.
Update Your Form W4
If you work a regular job (meaning that you aren’t self-employed or trying to work “under the table”), then you have to fill out a Form w4. Most people don’t think twice about this piece of paper. They fill it out when they first get a job. They hand it to their new boss or HR department along with many other new hire forms. It goes on file. That’s the last time they bother with it.
However, that form is really important. It tells the company how much of your money to withhold for taxes. When the tax laws changed last year, people were encouraged to update these forms. The main reason was that you’re no longer allowed to claim a personal exemption, so if you had claimed one, then you needed to change it.
That said, a lot of people didn’t know that they needed to update Form W4. If you didn’t do it last year, then you might not have gotten as much tax money back as you expected this year. Even if your tax refund was about average, it’s worth it to update your Form W4.
Understanding Form W4
Form W4, also called the Employee’s Withholding Allowance Certificate, tells your employer how much money to take from each paycheck to send to the government. Then when tax time comes around, you either owe more or get some of that money back. Most people prefer to get money back, so they find that it’s better to pay in as much as possible throughout the year.
You use a worksheet to determine your number of allowances. The more allowances that you have, the less money gets taken from your paycheck. That means there’s less money going towards what you owe on your taxes. Therefore, if you want more money to go towards taxes, then you need to take fewer allowances.
Of course, you have to claim the correct number allowances to keep things legal. You don’t want to go lying on your tax forms. But there’s a way that you can adjust this. The form has a section that asks if you would like additional money withheld from your paycheck. Most people mark “no” because they want to get that money right away. However, if you want to get more back at tax time (or at least make sure that you don’t owe anything come tax time), then you should think more carefully. If you have a lot of allowances, then you might want to use this section to increase your withholding to benefit you when tax time rolls around.
If You Have Exempt Status
It’s also important to note that you might have previously marked yourself exempt on this form. If you didn’t owe any money in the tax year before you filled it out, then you could claim exemption status. If you don’t make very much money, then that’s okay. However, if no money gets withheld, then anything that you owe at tax time has to come out of your pocket. Therefore, if you can afford not to claim exemption, then you might want to rethink doing so. If you pay in throughout the year and then don’t actually owe taxes, you get that money back in the form of a tax refund.
Remember that the more they withhold, the better off you’ll be. Of course, you don’t want to go into debt as a result. The IRS has a tax withholding calculator that can help you figure out the best solution for your W4.
Other Ways to Improve Next Year’s Tax Refund Starting Today
Updating your W4 form is the best thing that you can do right now to make sure that you get the best possible tax refund next year. However, it’s not the only step that you can take. Here are some other things that you can do:
Give to Charity
The new tax laws affected charitable giving. The changes made it so that more people benefitted from a standard deduction. Therefore, they didn’t do itemized deductions, which meant their donations to charity didn’t help them tax-wise. However, the new laws actually had some little-recognized changes that benefit people who do want to itemize deductions and get credit for giving to charity.
First of all, you can now deduct cash contributions as long as they don’t exceed 60% of your income. Secondly, there is temporarily (through 2025) no limit on total itemized deductions. Therefore, you can max out your donations to charity. You give to a good cause, and you’ll benefit on your taxes. Of course, make sure you read the detailed rules on charitable giving.
Save the Maximum in Your IRA
Your IRA is there to help you when you retire. You need that money. Therefore, you should be setting it aside now regardless of the tax benefits. That said, though, there are benefits, and it’s worth paying attention to them. The more that you put in your IRA, the better off you’ll be. You don’t even have to do itemized deductions to get this benefit. You can take that money right off the top when filling out next year’s taxes. You might even qualify for additional credit, the Retirement Saver’s Credit, depending on your income. Therefore, it’s to your immediate as well as your future benefit to contribute as much as allowed to your IRA account this year.
Review Your Credits and Deductions
When you file your taxes, you get to claim certain credits and deductions. Credits are great because they give you money back directly on what you owe. Deductions reduce the amount of taxable income, so they aren’t as beneficial as credits, but they’re still helpful. Most people don’t bother to review these things until it’s time to file taxes. However, if you have more information, you can make smarter choices throughout the year.
Review all of the credits and deductions that you might be able to get next year. Make adjustments accordingly. For example, you might get a deduction for paying student loan interest. If your student loans are currently set so that you aren’t paying interest, you might benefit financially from changing that. It can feel like a hassle to review those things, but it can also save you a lot of money come tax time.
Similarly, you might decide to upgrade your house with energy-saving in mind. You’ll save money immediately on energy, even though you might have to spend some time to upgrade. Furthermore, you might get tax benefits.
Even if you don’t change anything that you do right now, reviewing your potential deductions and credits can remind you to keep track of everything. The more you have written down come tax time, the better off you’ll be when it comes to finding those benefits.