Tax season has been over for a few months and the panic is over. Now’s the perfect time to gain a better handle on your tax situation with some tax planning. Have you withheld enough tax? Are you secretly hoping that the IRS has a “we’ve got your back” program? Spoiler alert: they don’t! Here are some practical tips to get you started:
Step 1: Find Out If You’re on Track
Before you can make any plans, you need to know where you stand. Generally, an underpayment penalty can be avoided if you use the safe harbor rule for payments described below. The IRS will not charge you an underpayment penalty if you pay the lesser of 90% of this year’s tax liability or 100% (or 110% for high earners) of the previous year’s tax liability. Your state may have different rules, so be sure to check those as well.
Free Resources
- IRS Withholding Calculator
- For in-depth calculations and deep dive down the tax rabbit hole: Dinkytown Tax Calculators
- Most states offer calculators on their revenue websites. As an example, check out Maryland’s Tax Calculator.
Step 2: Make a Plan
Once you know where you stand, it’s time to make a plan.
- Earmark funds for an upcoming tax bill in a high-yield savings account (or cash equivalent fund) for flexibility. This allows you to earn a little interest while you wait.
- Avoid investing these funds in the stock market for short-term needs.
- Make adjustments to any withholding for a more “glide slope” approach to paying your tax liability.
Step 3: Monitor Changes Throughout the Year
Your financial situation isn’t static; things change, and so should your tax strategy.
- Regularly review your income and expenses to adjust your tax strategy as needed.
- Revisit your withholding if you start generating income from a rental property or a side hustle to avoid surprises at tax time.
Finding the Right Professional
Feeling motivated to do some tax planning but that’s not how you want to spend your Saturday night? (Because who wouldn’t want to spend their free time in a thrilling game of tax chess with the IRS as your opponent?) Should you reach out to a tax professional, a financial planner, or both? Let’s break down what each one does:
- Tax Professionals: These include CPAs, Enrolled Agents, and Tax Preparers. They are equipped to file your taxes, represent you in tax court, and help you navigate complex tax issues. If you have specific tax questions or need assistance filing, they’re your go-to experts.
- Our MFAA advisors have a solid list of tax professionals with expertise in military taxes. Also, check out the Military Tax Experts Alliance.
- Financial Planners: These professionals help you strategize for future taxes and financial goals, such as retirement. They can provide guidance on how to manage your investments and income to minimize your tax burden. A good financial planner will review your overall financial picture and help you plan for future tax obligations.
When to Seek Help and Who to Reach Out To
It’s highly encouraged that you reach out to one of the above professionals if you:
- Haven’t Filed Taxes in a Few Years: You need someone who can prepare your taxes so this is where the tax professionals could help you out.
- Owe Money or Are Receiving Large Refunds: Owing money opens you up to potential penalties, while a large refund means you’re giving the government an interest-free loan for the year. A financial planner can help you review your income and expenses to prepare tax projections and recommend changes.
- Received a Notice from the IRS or State Revenue Agency: A tax professional can assist in communication with the appropriate agency.
- Are Transitioning Out of the Military: Work with a financial planner to navigate your potential state tax bill.
- Started a Side Hustle: A tax professional can help set up automatic payments, while a financial planner can assist with calculating quarterly payments.
- Are Turning Your Primary Residence into a Rental Property: This can complicate your tax situation, as you’ll need to account for rental income and potential deductions. A financial planner can help you see how this change will affect your overall financial picture (should you sell instead?). A tax professional can help during tax time by ensuring you maximize your deductions and comply with tax laws.
Tax planning doesn’t have to be a daunting task. By taking proactive steps and consulting the right professionals, you can make the process smoother and more manageable. Whether you’re preparing for a rental income, transitioning out of the military, or simply trying to understand your tax situation better, there are resources available to help you. The financial planners at the Military Financial Advisors Association are here to help!
This blog is provided for educational purposes and is not intended as individual investment or tax advice.