If you anticipate needing to make a tax payment next year, it’s wise to start saving as soon as possible. That way, gathering the money together is less of a burden. Plus, it could mean the difference between getting enough cash ready and coming up short. If you want to start saving now for next year’s tax payment, here’s how to go about it.
Do a Tax Payment Estimate to Determine How Much You Need
Before you can figure out how to save, you need to know exactly how much you’ll need. Usually, your best bet is to do a tax payment estimate. You’ll provide some details about your financial situation. Then, you can do some basic calculations.
Precisely how you approach this depends on your unique situation. Employed tax filers, self-employed individuals, and business owners all have to use different approaches.
In most cases, employed individuals can take advantage of the IRS Withholding Calculator. While its main purpose is to help you update your Form W-4, you can use it to estimate your liability as well.
Self-employed people and small business owners have to account for self-employment taxes, so they need to use a different calculator or do that math manually. Generally, that means planning on handing over 15.3 percent of their net profit to cover that tax specifically. They’ll also owe income taxes and, potentially, business-related taxes, which may have to be tabulated separately if the calculator doesn’t account for it.
Do the Math to Figure Out How to Save for Next Year’s Tax
Once you know how much you’ll need to pay, you can come up with a savings plan. First, take the total number. Next, divide it based on when you want to stash money away.
For example, if you want to set money aside every month, divide the total by the number of months you have before the tax payment is due. If you would rather divide it by the number of paychecks, weeks, or any other period between now and then, you can do that as well.
The idea is to identify a specific number that you’ll set aside each time. That way, you can potentially automate your savings, scheduling a deposit to occur at your chosen interval.
Find Opportunities to Save on Next Year’s Tax
Even if you feel that the money you need to set aside to handle next year’s tax payment is reasonable, that doesn’t mean you should forgo opportunities to save. Many tax-smart moves do more than lower your obligation; they also allow you to plan for your future, get reductions you are owed, and more.
First, make sure you track any financial activity that could be deductible. This is especially true for self-employed professionals and small business owners, as many expenses you have to shoulder reduce your taxable income. Keep all business- or work-related receipts. That way, you can enter those details when it comes time to calculate your taxes or create an estimate. If you are uncertain of the appropriate steps to take when it comes to projecting self-employment tax and expenses, consult with a CPA for help.
Additionally, review your participation in tax-advantaged accounts. For instance, if you are saving for retirement, your contributions may reduce your tax burden, lowering the amount you’ll owe for next year’s tax payment.
The same goes for educational expenses. Along with potentially being eligible for certain deductions, you may gain access to tax credits that allow you to pay less.
Precisely what’s available to you, again, depends on your unique situation. However, it’s always wise to spend time to explore the nuances of your finances, ensuring you are able to capture every tax savings opportunity that may be available to you.
Do you have any other tips to help people save for next year’s tax payment? Share your thoughts in the comments below.
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