As summer begins to wind down and we approach the last quarter of the year, it’s a crucial time to review your tax situation and ensure you’re on track. August offers a great opportunity to address any tax-related issues that may have arisen over the first half of the year and to prepare for the upcoming tax season. Here are some common tax mistakes to avoid in August to help you stay ahead and minimize your tax liability.
1. Neglecting to Adjust Withholding
One of the most common tax mistakes is failing to adjust your withholding as needed. Changes in your life, such as a new job, marriage, or the birth of a child, can significantly impact your tax liability. If you haven’t adjusted your withholding since the beginning of the year, now is the time to do so. Use the IRS Withholding Calculator to determine the correct amount to withhold from your paycheck.
2. Overlooking Estimated Tax Payments
For self-employed individuals, freelancers, and others who do not have taxes withheld from their income, making estimated tax payments is essential. The third quarterly estimated tax payment is due in September, so August is the perfect time to review your income and ensure you’re on track. Missing these payments can result in penalties and interest, so it’s crucial to stay on top of them.
3. Ignoring Retirement Contributions
Contributing to a retirement account, such as a 401(k) or an IRA, can provide significant tax benefits. If you haven’t been contributing regularly, consider increasing your contributions in August. Not only does this help you save for the future, but it can also reduce your taxable income. Remember, you can make contributions to an IRA until the tax filing deadline in April of the following year, but it’s wise to start as early as possible.
4. Forgetting About Tax-Deductible Expenses
Throughout the year, it’s easy to overlook various tax-deductible expenses. Now is a good time to review your expenses and ensure you’re taking advantage of all available deductions. Common deductible expenses include charitable donations, medical expenses, and education costs. Keep thorough records and receipts to substantiate your deductions when you file your taxes.
5. Missing Out on Tax Credits
Tax credits can directly reduce the amount of tax you owe, making them incredibly valuable. Some common tax credits include the Earned Income Tax Credit (EITC), Child Tax Credit, and education credits like the American Opportunity Credit and Lifetime Learning Credit. Make sure you understand the eligibility requirements for these credits and take advantage of them if you qualify.
6. Failing to Plan for Capital Gains
If you’ve sold any investments this year, such as stocks or real estate, you may be subject to capital gains tax. Understanding the tax implications of these sales is crucial. If possible, consider strategies to offset your capital gains with capital losses or other tax-saving strategies. Consulting with a tax professional can help you navigate these complexities.
7. Overlooking Changes in Tax Laws
Tax laws can change frequently, and staying informed about these changes is essential for accurate tax planning. For instance, the Tax Cuts and Jobs Act of 2017 brought significant changes to deductions, credits, and tax brackets. Keeping up with these changes can help you maximize your tax benefits and avoid surprises when it’s time to file your return.
8. Not Keeping Organized Records
Good record-keeping is vital for accurate tax filing and to substantiate any deductions or credits you claim. Use August as an opportunity to organize your financial records, including income statements, receipts, and other relevant documents. This organization will make the tax filing process smoother and help you avoid potential issues with the IRS.
9. Procrastinating Tax Preparation
It’s easy to procrastinate when it comes to taxes, but starting early can save you a lot of stress and potential errors. Use August to begin gathering the necessary documents and information you’ll need for tax filing. This proactive approach will give you ample time to address any discrepancies or missing information.
10. Failing to Seek Professional Advice
Taxes can be complex, and seeking the advice of a tax professional can be invaluable. A tax professional can help you navigate the intricacies of tax laws, identify potential savings, and ensure your tax return is accurate. If you haven’t consulted with a tax professional yet this year, consider scheduling an appointment in August.
Avoiding these common tax mistakes in August can set you up for a smoother and more successful tax season. By staying proactive and organized, you can minimize your tax liability and take advantage of available tax benefits. If you need assistance with your tax planning, consider reaching out to a trusted tax professional. At The Tax Axe, we’re here to help you navigate the complexities of tax planning and ensure you’re on track for a brighter financial future. Contact us today to schedule your consultation and take the first step toward optimizing your tax strategy.
