How to Estimate your Income Tax for Last Year?
Tax season is that time of year that most of us dread. We always know it is coming but we are never happy about it. For some, it is just the nuisance of taking the time to file the taxes because they always break even or even get a small refund. Others look forward to it because they know they are getting a hefty refund and they already have plans for it.
Many of us have no idea what to expect from one year to the next if we are getting money back or will owe big time. There is some good news for those of you who have no idea what to expect from one year to the next. You can estimate your income tax so that you have a fairly good idea of how much you will or will not owe when you file your taxes. Continue reading to find out more information about personal income tax and what you can do to help yourself.
What Are Income Taxes?
Before you can begin to estimate your income tax, you need some understanding of income taxes. Perhaps your only true understanding of them is that a lot of money is taken out of your paycheck for taxes and then you end up owing more money every year. This is frustrating for you because you do not want to lose any more of your money and you do not have a real understanding of why your money is taxed in the first place.
A tax is a charge that is a fee that is given to you by the government. You are required to pay it and cannot avoid it. If you do not pay it, you are subject to fines and potentially jail time. It is a serious offense to not pay taxes. Many people attempt to find ways to get around paying their taxes and the IRS always finds out.
There are legal deductions that you can take to decrease the amount of taxes you pay, but you must stay within the law when making those deductions. Every person and business is subject to taxes. There are different types of taxes, such as property, sales, estate, and income taxes. You are taxed for these items are varying times. I am going to focus on income taxes only for this article.
Filing a Tax Return
An income tax is associated with the money you earn that is as a result of payment for services rendered. There are different tax brackets that are based on the total earnings you have for one calendar year. The higher the tax bracket in which you fall, the higher the percentage of taxes you must pay. Everyone that earns over the limit set by IRS must file a tax return.
Why Should I Estimate My Taxes?
It is a good idea to estimate your income tax if you have no idea how much you will owe IRS. You receive a refund when the amount that was withheld from your paycheck is more than what you owe. However, if the amount that is withheld is too low, then you will owe money when you file your taxes. When you use a tax estimator, it helps you figure out how much money you owe or how much you might get back when you file your taxes.
If you determine that you owe money, it may give you an opportunity to be aware and save the money you owe. This way you will not be caught off guard when you file your taxes. The last thing you want is to be shocked by the amount of money you owe when you file your taxes.
Is There an Easy Way to Estimate Taxes?
The good news is it is fairly easy to estimate your income tax. The key is not to wait until the last minute to determine how much money you may owe. You should not wait to file your taxes. There are many different ways you can estimate your taxes. When you estimate your taxes, it can help you determine if you need to pay estimated taxes.
It is important to note that if you owe too much in taxes when you file your tax return, you may be charged a penalty for not paying enough taxes throughout the year. If you have been penalized in the past for not having enough taxes withheld and you do not want to change your withholding, you may want to consider paying quarterly estimated taxes.
Should You Make Estimated Tax Payments?
Once you have estimated your tax, you can answer a few questions to determine if you should make estimated tax payments. Do you expect to owe more than $1,000 in taxes this year? Is your federal tax withholding less than 90 percent of the total amount you owe in taxes? Do you think your tax withholding for this year is going to be more than the tax withholding from last year? If your answer is yes to all of these questions, you may want to consider making estimated tax payments. If you are in a position where you are considering this, you should consult a tax professional for help.
Is a Refund Possible?
There are many beneficial reasons why you should estimate your income tax. One of those reasons is to determine if you are going to get a tax refund. That is the question most of us would like to answer. If you know going into your taxes what the potential outcome is going to be, you would feel much better about filing your taxes.
Calculating Tax Refund
In general, your refund is calculated by how much money was withheld from your income for federal taxes minus the total amount of your federal income for that tax year. In this example, I am keeping it simple by not including any deductions. They come into play, but for ease of explanation, I will not touch on them. Also keep in mind that you must look at the amount of money that was withheld for federal taxes, not Medicare, Social Security, or state taxes, because those are additional withholdings.
Break Even If You Can
If you owed money last year, you may want to consider adjusting your withholdings so more money is taken out of your paycheck in hopes to break even or possibly get a refund. Many financial advisors suggest that breaking even or owing a little bit of money is a better position to be in than receiving a refund. In reality, you should aim to get as close to breaking even as you can. IRS has a tax withholding estimator on their website that helps you determine how much you should have withheld from each paycheck. This estimator does not take exemptions, deductions, and other withholdings into account.
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Documentation
In order to estimate your income tax correctly, you need to have some documentation available to you.
Know Your Information
There is some information that may make a difference in the estimate you receive. You need to provide your age, filing status, dependents, and their ages. Your earnings information is a key piece to your estimation. You also need your pretax income, and retirement plan contributions, the number of deductions you claim, and any taxes you have paid this year.
Business Expenses Matter, Too
Your business expenses also have a large impact on your income tax estimation. If you work from your house, or you pay for work items, you mostly likely can claim them on your taxes, or claim exemptions for them. You may have to file a separate business tax, if you are the owner of a business. You should also consider medical expenses, mortgage interest, student loan interest, childcare, and donations.
If you do not have this information, and you are making educated guesses, you should be aware the results of your calculations may not be the most accurate you can get.
Tax Calculator
There are many places you can go to estimate your income tax. You may even be able to find a tax tracker while you are on the hunt for a tax calculator. That is good news for those of us that are not that savvy when it comes to tax information. Tax calculators are fairly simple to find and a quick search on the internet can get you there.
There are tax organizations such as TurboTax and H&R Block that offer a tax calculator. There are other places where you can find a tax calculator that is not related in any way to an organization that files taxes. All of these different sites may have a different look and feel to their calculators. You may find one is easier for you to use than others. While they all may look a little differently from the others, they all require the same information from you in order to give you a proper estimate.
Do Not Delay
Regardless of when you estimate your income tax, you want to make sure you are handling your taxes timely. No matter if you have determined that you are getting a refund or owe money, do not delay filing your taxes. That is one of the biggest mistakes you can make. You can file as soon as you have all of your documentation.
You have already gathered all of your documents to estimate your taxes, so you should be ready to file. If you are due a refund, the sooner you file, the sooner you can get your money. Having the money deposited directly into your bank account gets it to you faster than waiting on a paper check.
I have told you that you should not delay filing your taxes, but no matter when you decide to file, it must be by midnight on April 15. Do not file late. Filing on time means that if you file on paper, your documents are correct and in a correctly addressed envelop with enough postage and postmarked and deposited in the mail by midnight on the 15th of April. Have you noticed that I said that date several times? Yes, because it is important.
If you file electronically, that means the date and time stamp of your sent return must be by midnight on April 15 in your time zone. If you file late, you face penalties that can become pretty hefty. If you owe money AND file late, you are looking at a 5 percent penalty on top of what you owe. That means, if you owe $2000, you face a penalty of $100 every month that you do not pay what you owe. That adds up quickly.
What If I Owe Money?
When you estimate your income tax, you may find that you are going to owe money. This may cause you to feel a great deal of anxiety. Perhaps you do not have the money, or you have the money, but do not want to hand all of your savings over to the IRS. So, what do you do? Believe it or not, you can calm your anxieties a little. IRS has a bit of a bad rep. They are not evil people looking to gouge you for all you have.
They do want their money, so please do not try to get out of paying them. As long as you show them that you want to pay them but just do not have all the money to give them at once, they are willing to work with you. The key is you have to be willing to work with them, too.
Make a Payment Plan Deal With IRS
You can work out a payment plan with IRS. Once you enter a payment plan with the IRS, pay them the agreed-upon amount. It is truly in your best interest to give them what you owe them. They can, and will, quickly go into collections mode. They will send you letters warning you it is coming. Do not ignore them. IRS does not like being ignored.
When they send you letters because you are late with your payments, interest is added to what you owe. They really give you every opportunity to pay them before they go after you for more. Every time you do not pay them, interest and fees are added. Once they have grown tired of attempting to get money from you, they will garnish your wages, if that is a possibility. If not, they will find other methods to get their money.
Should I Hire a Professional?
When you estimate your income tax, you may think you need professional help for your taxes. Honestly, it depends on your situation. If you have a simple tax return with only one source of income, you can most likely do your own taxes. Tax preparation software makes filing your tax return simply because they walk you through the process step by step. Many of us find taxes completely overwhelming and just do not want to handle it.
If your tax situation is more complicated, then you may want to consider consulting a CPA, or tax advisor. They may be able to advise you for one year and then you will know how to handle your situation in the years after that. Before you consider hiring a CPA, you should find out a little bit of information on that individual to determine if they are able to assist you with your specific concern.
You must have all of your documents compiled when you meet with a CPA. They need you to have as much information together as you can. You also want to find out how the CPA handles audits in the off chance you are audited. Most likely, you will not be, but it is best for you to understand what will happen if you are audited.
Conclusion
Taxes are scary, but you can get ahead of what you might owe by getting an estimate of your income tax. If you have all the possible information you need, filing your taxes does not have to be a scary proposition. One thing that you want to remember for sure is to file your taxes on time.
In addition to filing your taxes on time, you want to make sure that you honor any agreement that you enter with the IRS. They are willing to work with you, but you have to make sure your honor your agreements. When you estimate your income tax, it gives you a heads up of what you may owe the IRS. You should take advantage of the opportunity by having the money saved, or making a plan for how to pay back the money.