Reap the benefits of beginning-of-the-year income tax planning
By Steve Savant
Reap the benefits of beginning-of-the-year income tax planning by reducing withholding taxes or estimated tax payments now: Download a copy of the IRS publication 505: Tax Withholding and Estimated Tax off the IRS web site.
Many of us wait until the end of the year to do our tax planning. This is natural because we can soon file our return and get our tax refund to help reimburse us for part of the cost of our tax planning; like making an IRA contribution for example.
But we can really do that most any time of the year by adjusting our tax withholding or estimated payments as the year goes by. Adjusting our estimated tax payments, or payroll withholding, allows us to recoup part of the cash we need to fund our retirement planning or to use tax dollars to invest in our businesses.
For example, let’s say you pay your IRA contribution on Jan. 1. You can adjust your projected taxes now and reduce your withholding by the tax savings that result from this action. You could pay your IRA contributions monthly to match up closer to your payroll periods. Or you can pay it all up front if you have the cash to do it and slowly recover your tax savings over the year.
Just get your hands on the IRS Form W-4. Once you get it, fill it out and send it to your payroll people to reduce your withholding. You can do the estimate yourself or ask your tax advisor to help you with the calculation.
We all know that the sooner we invest our money the more we will have at retirement. Investing at the beginning of the year gives us about an extra year of compound growth. Just accelerating the investment for one year can make a big difference over time.