As a tax consultant and practitioner for the past 20 years, I can honestly tell you that tax planning during the year, is just as important as it is, when it comes time to file your tax return(s). Most people don’t think about their tax situation until they have to get their tax returns prepared. It does not matter who prepares your tax return(s), you are the one responsible for filing and paying the taxes. That’s why it’s important that you should be evaluating your tax situation throughout the year.

A person’s tax situation can change during the year. People change jobs, they may get a second job, they may change from being an employee to being an independent contractor or self-employed, or the amount of their income can fluctuate during the year, Other events that can cause a person’s tax situation to change could be drawing unemployment benefits or social security benefits, winning the lottery (a nice problem to have), the sale of property, the withdrawal of money from an Individual Retirement Account (IRA) or 401(k) plan, they may get married or divorced, they may have a new child by birth or adoption, All of these events can in one way or another change a person’s tax situation, Unfortunately, many times it winds up with the person owing additional money at the end of the year.

How can you avoid owing additional money at the end of the year?

You can avoid that by taking corrective action during the year. I always tell my clients that if their tax situation changes in any way or if they’re going to do anything that they think may impact their taxes, to inform me of their plans. This way I can tell them what the tax consequences could be, and what they can do so they don’t wind up owing a lot of money at the end of the year.

To help illustrate this point, I’m going to share a story with you that I tell people each year. In March 2000, I met with one of my clients to prepare his 1999 tax return. In preparing his tax return I learned that he made a substantial withdrawal from his IRA in December of 1999. This money was not only taxable, but it increased his income and it put him into a higher tax bracket. The bottom line was, he ended up owing the government a lot of money. And, to make matters worse, he had to come up with that money by April 15, 2000 (approximately one month away).

Had my client called me prior to withdrawing that money, I would have suggested to him to wait and withdraw that money in January 2000. By waiting until January to withdraw that money, he would be reporting that income on his 2000 income tax return instead of his 1999 return. And, any money owed would not be due until April 15, 2001 instead of April 15, 2000. I tell that story every year to emphasize the importance of tax planning and what happens when you don’t take into account the consequences of your actions.

The above story is just one of many examples of why it’s important to evaluate your tax situation throughout the year. The major factors that affect a person’s’ tax situation are: the amount of their income, the type of income (wage earner, self-employed or independent contractor, investment income, unemployment or social security benefits, etc.), and his or her filing status (single or married). Should any of those factors change, you should check to see how those changes are going to affect your taxes. The sooner you find that out, the sooner you can take corrective action to avoid owing any additional taxes come the end of the year.

There are also situations where you may want to re-evaluate your financial and/or tax situation each year. A lot of times people wind up having excessive amounts of income tax withheld from their paychecks during the year. This results in getting a rather large refund at the end of the year. On the other hand, there are also times when people wind up having too little money withheld from their paychecks and they wind up owing money at the end of the year.

A person can change the amount of money being withheld from their paycheck. They can file a new or corrected Form W-4: Employees Withholding Allowance Certificate with their employer. Having the correct amount of money withheld from your paycheck is important. It can often determine whether or not you will owe money or if you will get a refund. The IRS puts out an excellent publication on this topic entitled, “How to Adjust My Tax Withholding,” Publication 919. You can obtain this publication along with other forms and publications by clicking on the IRS website www.irs.gov. All IRS forms and publications are free and can be downloaded from their website. For those who don’t have a computer, you can call the IRS and order forms and publications.

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Having the correct amount of tax withheld is not only important for those who work, but it is equally important for people who are receiving unemployment and/or social security benefits. Unemployment benefits are taxable. Social security benefits may be taxable depending upon the amount of your income and filing status. You can elect to have taxes withheld from your unemployment and social security benefits so you don’t wind up owing money at the end of the year. You can request this by filing the Form W-4V: Voluntary Withholding Request with the unemployment office or social security office. Many times people are not told about this when they go to sign up to receive benefits.

For those people who pay their taxes quarterly through estimated tax payments, there is the Form 1040-E-S, which contains a worksheet to compute an estimate of person’s yearly’s income. This is an excellent form to calculate an estimate of your tax liability, withholding and estimated payments for the year. The Form 1040-ES can be used by self-employed individuals, independent contractors, those with investment income or anyone else. The IRS publication “Estimated Tax for Individuals”, Publication 505 provides information and instructions on how to estimate your tax liability and payments

This is why it’s important to re-evaluate your tax situation each and every year. Tax planning begins in January and goes on throughout the year. If you haven’t taken a look at your tax situation this year, now is a good time to do it, before the year quickly comes to an end.