While getting a large tax refund is nice, it’s not much of a benefit to allow the government to hold your money until it refunds your overpayment. By changing your withholding amount, you might receive more money on your paycheck that you can save in an interest-bearing savings account throughout the year. There are rules about how much you must have withheld or paid in estimates to avoid IRS penalties. Consult your tax advisor to make sure you are properly covered.
Fund your 401(k), 403(b), TSP or traditional IRA. By deferring wages into your pre-tax retirement plan, you will keep your taxable income lower. With these plans, you can save money for retirement and enjoy the benefits of getting tax-deferred compounding of earnings within the accounts.
Maximize your flexible spending account. Contribute pre-tax earnings to an employer-sponsored health or dependent care flexible spending account. You can reduce your tax liability and use the money saved for medical, dental and dependent care expenses.
Give. For 2015, you can gift anyone in the amount up to $14,000 without having to fill out a gift tax return. If you’re married, both you and your spouse can give gifts, doubling the $14,000 to $28,000. Just make sure that the gifts are given by Dec. 31.
Estimate taxes if you’re self-employed. To avoid an underpayment penalty on the unpaid amount, your estimated tax must be at least the lesser of the following: 90 percent of the tax liability shown on the return for the current year or 100 percent of the tax liability shown on the return for the prior year. You may want to use the “safe planning” technique to avoid a possible underpayment penalty, where you make estimated tax payments of at least 100 percent (or 110 percent if the AGI was in excess of $150,000 for the prior year) of the actual tax liability for the prior year.
Learn more by visiting the Andrews Federal Online Education Center at www.andrewsfcu.org/mem bereducation.