Believe it or not, 2010 is already half over. And while you’re seeking relief indoors from the triple-digit July misery outside — it’s currently a brain-melting 102°F here in New York — you might make use of this respite to think about your taxes.
Yeah, yeah. That's not the summer fun you'd planned. We get it. But as Hunt Valley, Md. financial planner and CPA Drew Tignanelli puts it,“The best time to do tax planning is in the year you’re planning for.” And with six months left in 2010, there's plenty of time for you to make strategic moves that can help reduce your tax bill next April.
All this week, we’ll be posting advice from Tignanelli and other tax experts on what you can at this midpoint to save later on. (Sorry, procrastinators, most of these moves require time that you won't have on December 31.)
First things first: You'll want to make sure your tax situation hasn’t changed in such a way that will have you owing significantly more or less to Uncle Sam next year, says Tignanelli. Better to know now so that you can either pay up over time or reclaim the bucks you’re lending to the IRS interest free. He suggests doing an estimated tax analysis if you meet any of the following criteria...
•you retired in 2009 or 2010
•you are self employed, get paid all or in part on commission or otherwise have unpredictable income
•you have received significant or unusual investment income
•you have had some other unusual income in the last six months (such as a bonus)
•you have realized significant capital gains or are about to
•you changed jobs or lost a job
•you are aged 70 ½ or older and had to take a required minimum distribution from retirement accounts
If any of these apply to you — or if you got a big refund or bill in April and haven't done anything about it since — you'd be wise to assess the situation. This calculator can help you estimate your total tax bill for 2010; you should then go back to your most recent paystub to see if you're on track to pay that much by Dec. 31, 2010 (your payroll department can also help you figure this out). Alternatively, Tignanelli says that a tax preparer should be able to do all this work for you in a half-hour session.
Should it look like you'll owe or be owed a significant amount, you'll want to submit new W4 and state withholding forms. Since more exemptions mean less tax withheld, reduce the number of exemptions if you need to pay more (or choose to have a specific amount withheld per paycheck on line 6); dial back the exemptions if it looks like a refund is in your future.
It's not the most fun you'll ever have to be sure, but it's a lot less torturous than going outside on a day like today. And it'll make next April a lot more pleasant. Stay tuned later this week for tips on reducing taxable income, planning for credits and deductions and selling investments strategically.
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