Jun
Now that tax season is over I believe it is time to address your 2015 income taxes based on the outcome of your 2014 tax return.
Am I kidding it’s just barely May and I should be thinking about my 2015 taxes?
The answer is yes and here is why. If you owed any money on your 2014 income tax returns then you must examine why so you can stop it from happening again. Typically what I have found is that when taxpayers receive income that has no associated withholding that’s where the problem starts.
To illustrate what I mean by this I will use the example of a married couple with 2 children. In my example the couple knows how much both the husband and wife are being paid and can estimate with a strong degree of accuracy the amount of interest, real estate taxes, charitable contributions and state income taxes that will be paid in 2015. In other words, they can estimate their itemized deductions fairly easily and therefore can calculate their relative withholding on each of their paychecks.
The problems, in my opinion, that most often will derail your tax planning are the income items that typically do not have any withholding. These items can be interest or dividend income, capital gains, income from S corporations, partnerships, LLCs or estates and sometimes retirement income. Most of these items do not have federal or state withholding taken out when the income is received. I mentioned retirement income as a sometimes issue because typically the ability to have withholding is there but many times taxpayers under withhold on their retirement income and maybe not at all on their social security income.
Lastly, there may be a change in your 2015 tax situation that should be addressed. For example maybe you had large medical bills in 2014 that you will not have in 2015 and therefore your itemized deductions will be down. If you are receiving social security up to 85% of social security benefits may be considered taxable income depending on your other income. If less than 85% of your social security benefits were taxable in 2014 but you expect additional income in 2015, be aware that more of your social security may be taxed in 2015.
What can I do if I know my situation will change in 2015?
Generally there are two ways to ensure that your tax liability will be taken care of. The first is to make quarterly estimated tax payments to make up for any taxes on income that does not have any withholding and the second is to increase your withholding on the items that do have withholding.
Conclusion
This article gives a very brief summary of how paying attention to your particular tax situation during the year can mitigate the possibility of owing money in April. In no way am I saying that this process is easy and I would encourage anyone trying to perform these calculations to contact a tax professional.