Three Important Tax Tips You Can Apply Now to Avoid Paying Higher Taxes in 2009!

Obviously we are not ready for any unpleasant surprise when we file our taxes. We always remain optimistic for a nice and attractive tax refund and we never want to end up paying tax balance. Generally, the tax refund takes place only when the taxes paid plus the available tax credits are more than what we owe towards taxes. If this is not true, then we owe a tax balance.

With busy life style and more pressing issues around, we hardly think about this tax refund/balance payment situation until the end of the year. But if we want to be able to avoid unpleasant surprise (tax balance), then we really need to be little more proactive and keep an eye throughout the year, on what increases our tax liability. Here are some areas that need our monitoring.

Monitor Pay Check Tax Deductions: You need to make sure that right taxes are withheld from every paycheck. Please make sure that Federal Income Tax deduction is in compliance with Federal Income Tax withholding table and your W-4. If necessary, call your Payroll Company to have correct and better understanding of this issue. If necessary, submit new W-4 for voluntary higher tax deduction.

American Recovery and Reinvestment Act: One of the the other possible reason for under deduction of Federal Income Tax (FIT) could be the new withholding table under the American Recovery and Reinvestment Act reduces the Federal Income Tax withholding (FITW) to reflect the ‘Make Work Pay’ tax credit. With this, some of the employees might end up with under deduction of taxes and resulting in possible penalties. Employees most likely to be affected are: Two-earner married couple, Individuals with more than one job, A dependent on another’s tax return (they do not qualify for the credit but you will withhold as though they were), Individual receiving pension, and/or Economic Recovery Payments. Individuals falling under these categories need to review FITW. If it is too late to submit a new W-4 for higher tax deductions, please see if you can make some estimated tax payments to save some possible late fees and penalties.

Hidden and silent increase in tax liability: Many times the following sources of Income have inadequate or no Federal Income Tax withholding from income.

* Taxable Interests and Dividends
* IRA Distributions: If not reinvested, this attracts additional tax penalty.
* Capital Gain
* Business Income
* Alimony received
* Unemployment compensation (over $2400)
* Pensions and Annuities
* Rental and other income
* Gambling and Lottery winnings
* Social Security Benefits

You need to be proactive here. Do not wait until the end of the year and approach your tax adviser right away to find out how best these can be handled with some tax saving strategies. Even after this, if you owed taxes, you have two options. The first one is do nothing and wait until the end of the year and pay huge tax balance with late fees and penalties when you file your taxes. The second option is to make estimated tax payments during the tax year and save some possible late fees and penalties.

There are some other factors that might help you. You need to be organized to maintain proper and handy notes, and receipts of all our tax deductible expenses. When you are itemizing your deductions and if your -reimbursed medical expenses do not exceed 7.5% of your adjusted gross income, it may not reduce your Federal taxes but it might reduce your State taxes - so it is worth reporting. It is not that easy for everyone to stay on top of all tax law updates at all times and that’s why you need someone to help you. Contact your local tax agent or get in touch with us if you need more help on this topic.

Bipin Bhatt is a New Jersey based Accountant.  He offers high quality & affordable accounting, tax, & payroll services through his accounting firm http://www.KBAccountingAndTaxes.com - Bipin offers expert NJ tax return services as well as nationwide tax, accounting, and payroll services.