For many people, the thought of dealing with their taxes and finances makes them want to crawl into bed and put the covers over their head. We sometimes overthink what we need to do to manage our money. Yes, we can set up sophisticated systems and hire money managers, but for most of us, we really just need to do a few simple things. In 15 minutes, here are 3 easy-peasy steps to do a little tax planning:
- Make a tax file for 2021. Or, make two, like I do. One is an actual manila folder in which to put pieces of paper I receive that I may want to save for my tax records. The second is a file on my computer where I file pdf documents, including emailed invoices and bank statements. As documents come in, I file them in their respective folders. Bank statements, donation acknowledgements, W-2s, 1099’s get filed as soon as I receive them. I don’t think about them — I just file them and will deal with them later. I recommend you do the same — don’t leave them in your inbox or in envelopes on the dining room table. File them when they arrive! It is a clutter-buster, both physically and mentally.
- Did you owe taxes when you filed this year and would like to not owe next year? If you receive a paycheck from your employer, now is the time to adjust your withholdings. Divide the amount you owed by 52 to determine the weekly amount, and add that additional amount to your paycheck. For example, if you owed $1,000 to the federal government, dividing that by 52 gives you $19, which we will round to 20. If you get paid every other week, have an additional $40 withheld from every paycheck. Complete a W-4 (https://www.irs.gov/pub/irs-pdf/fw4.pdf) to have this additional $40 taken out of your paycheck each week. Do the same calculation for state taxes. (Here is the link to Maine’s W-4 https://www.maine.gov/nrsc/forms/2020%20-%20Maine%20W4.pdf.) I know that there are only a few pay periods left in 2021 and you might still owe when you file, but this is an easy first step! And, you will be all set for 2022 because that additional withholding will carry through the entire year. If you are self-employed and pay estimated taxes but still owed for 2020, increase the amount of your estimated tax payment due January 15, 2022.
- Do you donate to charities? Even if you don’t itemize on your tax return, you may still deduct up to $300 in cash contributions to 501(c)(3) organizations ($600 for married couples filing jointly) in 2021. Now is a good time to make those donations if you have not already done so.
And, voila! You just did some tax planning!