photo credit: Paul Keleher

I can’t believe that the year is almost half over already.  However, now is a good time to do some preventive maintenance regarding your taxes.  Rather than being surprised with a huge refund or even worse, a huge tax bill, next April, take a little time this week to get a rough estimate of your tax situation.

One way to do this is an easy, ‘back of the envelope’ calculation.  Add all your income (wages, interest, freelance income, rental income, etc.) then subtract your deductions, either the standard deduction or itemized deductions (i.e. mortgage interest, charitable contributions, state and other taxes).  Also, subtract personal exemptions (one each for you, your spouse if you’re filing jointly and any dependents).  This gives your taxable income.  You can the tax tables at the IRS site to find out how much your tax liability will be.  Then compare this to the amount of taxes currently being withheld.

Personally, I prefer to be as close to zero as possible but would rather pay a few hundred than to get a refund (an interest-free loan to Uncle Sam).  If you find that you’re on track to get a large refund, consider lowering your withholdings to have less taken from your check.  If you find that you’re on track to owe a large amount, consider making IRA contributions (if they would be deductible for you) as well as increasing the amount withheld.   While I don’t advocate large refunds, a large tax bill isn’t good either.  In addition to the possibility of not being able to come up with the funds, you run the risk of an underpayment penalty.  So play it safe and don’t run afoul of the IRS.