I’m Projected to Owe Taxes Next Year – What Should I Do Now?

With tax season right around the corner, you may be wondering whether you paid enough taxes this year. Have no fear — we’ve compiled a list of money moves you can make before December 31st to improve your tax picture.

Contribute More Towards Retirement

If you’re contributing to your company’s 401(k) and/or traditional IRA, you are lowering your taxable income now in addition to building your retirement stash.

Right now, the contribution limit for a 401(k) is $19,500 ($26,000 for 50 or older) and $6,000 ($7,000 for 50 or older) for your IRA.

You may also be eligible for the Saver’s Credit worth up to $1,000 ($2,000 married filing jointly). The Saver’s Credit is a little-known tax credit that lower to middle-income taxpayers can get just for contributing to their retirement. Because it’s a credit, it will reduce the taxes you owe dollar-for-dollar.

You also don’t need to know how to claim the credit when you use TurboTax. TurboTax will ask you simple questions about your retirement contributions and automatically give you the Saver’s Credit based on your entries.

Donate to Charity

The holiday season is a great time to clean out your closets and household goods to give to those in need. You can help someone in need and reap the benefits of a tax deduction for non-cash and monetary donations donated to a qualified charitable organization.

If you volunteer at a qualified charitable organization, don’t forget that you can deduct your mileage (14 cents of every mile) driven for charitable service.

Make these donations count on your taxes by donating by December 31st. Even if you make a donation by credit card, you do not have to pay it off in 2020 to receive the tax deduction.

Typically, if you make a charitable donation to a qualified charity, you can deduct the contribution if you can itemize your deductions and not claim the standard deduction. However, under the CARES Act, there is the addition of a new charitable deduction up to $300 on your 2020 taxes for your cash donations made to a 501(c)(3) organization even if you don’t itemize your deductions. For 2021, this amount is up to $600 per tax return for those filing married filing jointly and $300 for other filing statuses. This will be something for taxpayers to keep in mind since close to 90% of taxpayers now claim the standard deduction instead of itemizing and are no longer able to deduct charitable contributions under tax reform.

If you can itemize your deductions, cash donations are usually limited to 60% of your adjusted gross income, but the CARES Act eliminates the limit for tax year 2020 returns (the ones you file in 2021).

Don’t Forget About Things You Do All Year

Don’t forget that things you do in your everyday life can amount to a tax deduction or credit that can improve your tax picture! Be sure to gather and keep track of all your receipts for tax-deductible expenses like childcare, college, and medical care so you can include them in your taxes.

Also, keep in mind you may be eligible for relief under the CARES Act, the Families First Coronavirus Response Act, and the Second Coronavirus Relief bill.

Know Where You Stand

As the end of the year approaches, it will be helpful to know where you stand with your taxes and finances so that you can make smart money moves. If you haven’t already, you should go ahead and review your numbers.

We use free tools to help us figure out where we stand and make tax-saving moves. One of the free tools is the TurboTax TaxCaster, which gives you an estimate of your tax refund or lets you know if you may owe so you can make some smart tax moves before the end of the year.  TurboTax TaxCaster has also been updated for impacts of coronavirus and coronavirus relief.

You can also use the TurboTax W-4 calculator to get an idea of where you stand so there are no tax surprises. Although you may feel it’s too late in the year to make an adjustment to your withholding for 2020, you can use the W-4 calculator to see how much taxes you should have taken out and either ask your employer or payroll provider to take more out of your last paycheck, or you can make a quarterly estimated tax payment on the last quarterly estimated tax deadline for tax year 2020, which is on January 15, 2021.

Save Up Now

If you find out you owe now, you can make these smart money moves to reduce the taxes you owe and can also start planning how to pay and save up now. You can also start automating transfers into savings — if saving doesn’t seem possible with your current budget, try doing a money challenge. It can be an effective way to save more by making a game out of it.

You may also realize some new ways to optimize your budget going forward, and if you ultimately find your tax bill is still too much for you to pay at once, reach out and set up a payment plan with the IRS.

Thoughts on Handling Taxes

As you can see, you can get some huge wins with your taxes by making sure you’re claiming all applicable tax deductions and credits you qualify for. By starting now, you’ll give yourself more time to get things squared away so you’re ready for tax time.

Don’t worry about knowing these tax rules. TurboTax asks you simple questions about you and gives you the tax deductions and credits you’re eligible for based on your answers. TurboTax also has Covid-19 Guidance to help you through the biggest impacts this year like stimulus payments and unemployment.

If you have questions, you can connect live via one-way video to a TurboTax Live tax expert with an average of 12 years experience to get your tax questions answered. TurboTax Live tax experts are available in English and Spanish year round and can also review, sign, and file your tax return or you can fully hand over your taxes from start to finish to a TurboTax Live Full Service tax expert all from the comfort of your home.