Many clients call us and ask, “What can I do at the end of the year to reduce my taxes?”
There are steps we can take to alleviate some of the pain of filing your 2019 tax return. By reviewing your 2018 return, we can determine whether:
· You received a refund or paid a tax
· Your 2019 income is similar to 2018
· Your federal and state withholdings for 2019 are similar to 2018
· Your 2018 and 2019 deductions and credits will be similar
Once the above factors are determined, if you paid a tax in 2018 the biggest and best bang for your buck is to pay a fourth quarter estimated tax. This will help alleviate some of the tax pain with filing your 2019 tax return.
Generally, when we have a client with a 2018 tax due, we recommend two remedies: either increase withholdings to cover the tax due or pay four quarterly estimated tax payments. Most clients prefer to increase their tax withholdings with each paycheck, as this feels less invasive and daunting than paying quarterly estimated tax payments.
If you received a refund with your 2018 tax return filing, assuming it is a reasonable amount you will most likely take no action. However, if you received a large refund, you should consider incrementally reducing your withholdings. The reasons against receiving a substantial refund is that you are losing potential interest income if you saved the excess withholdings and secondly, you are giving the government an interest free loan. As it is not soon likely for the government to give you an interest-free loan, the most financially sound decision is to manage your money effectively by decreasing your withholdings (and boosting your paycheck!).