|Credit: Stuart Miles|
The first thing you need to do is pay up. It stinks, but don’t add penalties and interest to your pain. Realize that if you promptly settle up by April 15th, you really haven’t done anything wrong. On a brighter note, at least you can have the satisfaction of knowing that you didn’t let those people in Washington, D.C., hold any more of your money than they should have. If you invested some of your money last year and now owe taxes, you may have even come out a tiny bit ahead than if you had gone ahead and withheld more taxes or made larger estimated payments!
The second thing you need to do is figure out what happened. Do you always owe more taxes? If so, you may want to consider changing your tax withholdings or making larger estimated payments. If this is the first year you owed more taxes, what changed? Did you make more money (larger income base, higher tax brackets)? Did your stocks do unusually well (more dividends, realized gains, or capital gain distributions)? Were you healthier? Did you refinance or pay off a mortgage (we refinanced in 2013 and definitely noticed a difference on our mortgage interest deduction!)? Did you give less to charity? Any of these changes can result in fewer itemized deductions. Did you somehow stumble into Alternative Minimum Tax? It’s also worth mentioning that if you owed Uncle Sam, you will probably need to pay either 90% of your expected tax for 2014 or 110% of the tax shown on your 2013 return (whichever is smaller) to avoid an estimated tax penalty next year. Consider meeting with your CPA to take a good hard look at what happened in 2013 and what is likely going to happen in 2014. You have time to adjust things for 2014 now, but you won’t in April 2015!
There are tons of things you could do to make sure you get a refund, including beginning to make estimated tax payments (or making larger estimated payments), increasing contributions to your Traditional 401(k) (so that you have less taxable income), or simply adjusting your automatic tax withholdings. Since people most commonly owe more taxes because they have gotten a raise or an itemized deduction decreased (like medical expenses or mortgage interest), it is important to periodically think about adjusting your withholdings proactively.
To adjust your withholdings, go to your employer’s accounting or human resources department and tell them you’d like to adjust your withholdings. They will likely give you Form W-4 and your state’s equivalent to the W-4. The form is pretty simple and people most frequently elect to have more taxes withheld from their checks if they’re married by putting a “0” on Line C (because they have a working spouse, they work two jobs, or earn a lot of income), or if they’re single, by requesting to have more withheld from each paycheck on Line 6. If you need more assistance, the IRS has put together this little withholding calculator app to try and assist taxpayers. As always, I’m happy to help anyone with questions, but this is another example of where tax preparation software may not be all you need to help with your taxes and tax planning!
I prefer to get a small refund, and I think most people feel the same way. It just feels better and makes things easier. If you find that you owe more than you paid in this year or got a refund that was so small you could barely purchase breakfast, as painful as it may be, I’d suggest you go ahead and start thinking about your taxes for 2014.