When is the Best Time for a Tax Check-up?

Can you believe we are halfway through 2016? Speaking tax-wise and barring major life changes, that means you can easily figure how things may look at the end of 2016 – so now is the best time for a tax check-up. I do this exercise every year for financial planning, tax estimating, and just to eliminate surprises at tax time and I recommend every one do it. Some simple math, a copy of last year’s tax return; your income through June 30, which is easily found on your paystub; a piece of scrap paper; and a calculator are all you need to conduct your own mid-year tax check-up. This estimate will give you a good idea of your tax situation at the end of the year and subsequently at tax return time.

Since July 1 marks the halfway point of this leap year, you simply double the amounts you know and then figure out your estimated tax to determine what your taxes will look like at the end of the year. First, take last year’s tax return and that paystub or, if you are self-employed, your income from January 1-June 30. Find the year-to-date total earnings, double the amount, and write it on the copy of your tax return next to the Total Income line. Next, review your tax return for any adjustments to income. Compare those adjustments to the past six months and estimate what you might have this year for adjustments, for example, IRA contributions or student loan interest. If nothing is much different from last year, simply use the prior year amount as an estimate for 2016. Do the same for the other sections of your tax return, like dependents, itemized deductions or your standard deduction, adjusting for any life changes during the year that you have had or you expect to make. Write the appropriate numbers for each line to the right of the last year’s amount, total it all up just like you did for Total Income and you are half way there.

Now, look again at the June 30 paystub and note your year-to-date Federal Tax Withholding. Double that amount and write it next to the line for taxes withheld on your return copy. If you are self- employed, use your two estimated tax payments (you did pay April and June – didn’t you) and again assuming nothing else changes, double the total payments made so far and write that number next to estimated payments and amount applied from 2014 return. At this point, you are getting closer to a good estimate of what your tax return may look like for 2016. Next, figure your estimated tax rate, use last year’s tax amount, and divide it by your taxable income. You can now use that tax rate to estimate your current year tax using the taxable income you just estimated. Finally, compare your tax liability projection amount with the projected tax paid for 2016 amount. If your projections have paid more in than due, you could be getting a tax refund; if not, then, without changes, you may owe come tax time.

Alternately, there are a number of tools at IRS.gov to help you compute your 2016 tax estimate, but I believe the exercise above helps you understand your taxes better and therefore might give you a feeling of more control and less fear when it comes time to actually do your 2016 taxes.

Remember when doing a projection like this it is an estimate for projection purposes. If your income is about the same for 2016 and the taxes you paid are the same, your tax refund or amount due should be about the same. If not, you need to consider what changed, so you can take appropriate action especially if you want to be part of my Happy About a Big Refund Gang. This year, you can celebrate Independence Day by looking forward to keeping more of your money come tax time.

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