Take Your Taxes for a Test Drive Before Year’s End


15 December,2014

Most of us are deep into holiday planning right now, and have no desire to think about taxes. However, before the year comes to an end, it makes sense to take your taxes for a test drive. You should take the time to determine whether or not you are likely to owe money. If you do owe, knowing where you stand now can be a great help in terms of preparing you for what’s next.

Reduce Your Tax-Related Surprises

Waiting until the last minute to prepare your tax return can mean an unpleasant surprise, especially if you owe money. You might not have time to get your finances together in order to ensure that you have the capital on hand to make your tax payments. As a result, you could easily find yourself scrambling — and in debt — to make your payment.

Figuring out where you stand right now makes sense. Hopefully you have been making quarterly tax payments, and are mostly up to date on what you owe. If that is the case, taking your taxes for a test drive is more about peace of mind than anything else.

However, there are some cases in which you might owe more than you expected, even if you have been making quarterly payments. If you figure your taxes now, before you run into issues at the last minute, you will be able to prepare ahead of time, and be in a better position to pay your taxes in full. It’s better to know ahead of time, rather than be surprised at the last minute.

Figure out How to Reduce Your Tax Liability

Taking your taxes for a test drive now can also help you see what you might be able to do in order to reduce your tax liability. Are there more tax breaks you can take before the year runs out? From investments sold at a loss, to another charitable contribution, to a dependent care tax credit you forgot about, now is a good time to review the situation and make moves that can reduce what you owe.

While there are some tax breaks available to you after the new year, the reality is that most of your tax breaks for the current year need to be taken by December 31. With that in mind, you can make a lot of progress now to reduce your tax liability come April. My accountant is always a great deal of help when it comes to identifying ways to reduce my taxes.

Begin Preparing to Pay

One of the best reasons to take your taxes for a test drive right now is so that you can begin to prepare to pay what you owe. If you know that you are going to be $1,500 short come April, it’s a perfect time to plan ahead. I usually owe a little more on my taxes, due to the fact that I keep earning more income. As a result, I like to take my taxes for a test drive. If I know, in December, what I will owe come April, that gives me time to adjust. If I am $1,500 behind, I can plan to set aside $500 extra a month in January, February, and March in order to meet my deficiency in April.

This might mean that I need to take on extra projects in order to earn more money, or that I might need to forgo certain luxuries in my spending to save the money. Knowing now provides me with more options in the long run, and gives me the chance to make changes without completely ruining my situation.

With a little foresight, you can avoid pitfalls, and make it a point to be properly prepared for tax time.