Tax season is not just about preparing the tax return for the prior year. In fact, after the tax year ends about 90% of the average taxpayer’s tax planning opportunities are no longer available. This makes tax season largely about accurately recording history and settling up with the federal, and possibly the state, tax authorities. However, tax season is also a great time to get a head start on planning for the current year’s taxes while there is still a lot of flexibility to make changes.
One of the key tax planning activities that should be taken advantage of during tax season is to review tax withholdings. If there is a projected amount due, tax season can be a good time to change tax withholdings so that any extra withholding is spread over a longer time period and therefore the change in monthly take-home income will be reduced.
On the other hand, if there is a large refund projected, it may be beneficial to change tax withholdings to reduce the amount of money the government gets to hold on to, interest-free, during the year. In fact, this may be a common issue for a number of taxpayers this tax season as some new tax law provisions have created additional deductions which may lower some taxpayers’ tax burden. For example, the addition of $6,000 to the standard deductions for taxpayers over age 65 who meet the income limits may result in less tax due going forward. Married taxpayers who are both over age 65 with total income under $150,000 could save as much as $2,640 per year, or $220 per month. This may be a large enough reduction in taxes to warrant reducing income tax withholding.