There are many good reasons to calculate or estimate the taxes you will have to pay for the year before you file your return. Below are two of the most common reasons you may want to do so.
Avoiding Too Much Withholding from Your Paycheck
If you are an employee with a steady job and your cash flow is tight, you may not want to have too much withheld from your paycheck. The withholding tables and schedules are set up to protect people from coming up on April 15 with a big tax bill due. So instead, they have an automatic overpayment cushion factored in when your taxes are withheld.
You can avoid this by simply increasing the number of withholding allowances you claim. This is entirely legal and appropriate and helps you avid making an interest free loan to the IRS that you can't collect until you file your taxes next year.
Getting Your Quarterly Installments Right
If you are in business for yourself, you know your business better than anyone else. You know whether cash flow varies or is steady throughout the year, and which seasons are more profitable than others.
Your business budget should give you a reasonable estimate of your profit or loss. From this budget, you can estimate how much tax you will owe. As each quarter goes by, you can recalculate your estimate for the year and determine which method of calculating what you pay for any quarter, e.g. prior year tax due, current year expected earnings, etc., in order to match up with your own cash flow and budget expectations.
Estimate Your Taxes Now to Make Sure You're On the Right Track!
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Right now, you can click on TurboTax Online to calculate what you will owe for this tax year. TurboTax is the largest online tax service and provides you with calculations that are completely up-to-date on changes in the tax law and the latest information you will need. |
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