The IRS is owed over 80 billion dollars in back-taxes.
If that massive number shocks you, it shouldn’t.
The United States economy is booming which means that people have more expendable income than ever. Unfortunately, many of the people that are experiencing spending power for the first time don’t have the financial education to understand that portions of their earned income are already spoken for by the government.
If that money gets spent and there’s nothing left when tax time rolls around, you can see how back-tax problems can form.
Our aim with this post is to make sure that you’re not one of those people that gets caught off guard!
Here are tips on how to accurately estimate what you’ll owe in taxes and how to set aside tax savings to ensure that you’re prepared in April.
1. Use IRS Forms
The IRS understands that the average person doesn’t know how to deduce what they’ll owe in taxes. To help bring people into “the know”, the IRS offers a nifty tax estimator called a 1040-ES.
If you download that form, fill in the boxes and add everything up correctly, you’ll be presented with a lump sum that you’re going to have to pay the federal government on your earnings.
Break that number up into 12 portions and you’ll understand how much you need to put away in tax savings on a monthly basis.
2. Go Off of Last Year’s Tax Returns
If you’ve never filed taxes in the past, this tip isn’t going to be helpful to you. If you have filed before and major changes have not been made to your employment situation, your previous tax returns serve as a great shortcut to estimate this year’s tax burden.
Download your most recent return and see how much you paid in taxes. Divide that number by 12 to come up with the amount of money that you should put away each month to be covered by the end of the year.
3. Talk to An Accountant
It can be difficult to navigate IRS forms to figure out what your tax burden will be. One wrong move and you might wrongly estimate which could lead to a horrible surprise when you file.
To give yourself the best chance of coming up with accurate tax savings goals, talk to an accountant.
There are a number of small, community-based accountants in operation or accountants that work under national brands like H&R Block which accept appointments year-round.
4. Use Online Calculators
If you typed into Google “federal income tax estimator” you’d be bombarded by a number of calculators that’ll deduce what they think your tax burden is going to be.
Many of those calculators can give you ballpark numbers that can help you frame your tax questions. It’s important to know though that online calculators are far from perfect.
Most tax calculators will not take into account various deductions that you qualify for. They’ll simply note your annual income, apply it to current tax rates/brackets and give you your result.
For a more accurate tax estimate, you’ll want to look for answers elsewhere.
5. Leverage Bookkeeping Applications
There are applications out there that are used by businesses to track income and expenditures. These tools have built-in tax estimators that are accurate and even allow you to pay your estimated taxes directly to the IRS from within the application (QuickBooks is a good example of a tool that offers that feature).
While built for companies, popular bookkeeping applications that are targeted at “sole-proprietors” can be used by W-2 employees.
6. Have Your Employer Withhold on Your Behalf
If the only way that you earn income is from a single job, having your employer withhold money from your paycheck is the easiest way to manage your tax savings.
When asked by your employer how much you’d like withheld, to be safe, opt for the highest withholding amount. That way, you’ll get money back come April and will never have to worry about owing the IRS anything.
What Should You Do With Your Tax Savings?
If you’re going to use one of our tips to manually set aside tax savings, you might be wondering what you should do with that pot of money you’re going to be building throughout the year.
You have two options:
Pre-Pay the IRS
The IRS allows you to pre-pay your estimated taxes through its EFTPS portal. Depending on your situation, you may be required to pre-pay your taxes.
If you don’t, you could be liable to pay penalties based on the amount of interest the IRS lost by not having received your payments sooner.
Put Your Money Into a Savings Account
If you prefer to pay the IRS a lump sum of money at the end of the year, find a high-interest savings account to put your tax savings in.
As months pass, your tax savings will accrue interest which is free money that you can pocket as a reward for being a responsible saver!
Just be aware that the IRS will tax you on that interest via its 1099-INT form…
Wrapping up How to Accurately Set Aside Tax Savings
Accurately estimating your tax burden and setting aside tax savings each month to meet that burden is essential to leading a successful financial life.
We hope that our tips have helped you to better direct your tax management efforts and we welcome you to read more of the budget-centric content on our blog if you’re looking for more information!