Tax planning is not something that should take place on April 14th. If you wait until the last minute to do your taxes, you could miss out on valuable deductions and end up paying more than you should. Worse yet, you could find that you owe a lot of money to the IRS--and have no way to pay what you owe. Doing some ongoing tax planning throughout the year and estimating what you might owe is the best way to avoid this unhappy situation.
Gather as much financial documentation as you can. You will not yet have your W2 form, but you do have your pay stubs. You don't have the 1099 forms from your banks and brokerage firms, but you do have your monthly statements. The more information you can gather, the more accurate your estimate can be.
Download a copy of the 1040 form from the IRS website or use your favorite tax preparation software to start a new return. Using tax preparation software is easier because the software does all the calculations for you.
Check the IRS websites to see if the personal exemption and standard deduction amounts have been revised yet. These amounts are revised periodically, and having the most up to date figures will make your tax estimate more accurate. If the new figures are not yet available, use the amounts shown in the instructions for the 1040 form or included in your tax preparation software.
Complete the 1040 form just as if you were actually doing your taxes. Use your pay stubs to estimate your wage income. Just multiply the gross amount by the number of pay periods. For instance, if you are paid every two weeks, you have 26 pay periods. You can estimate your annual interest and dividends by multiplying the figures on your monthly bank and brokerage statements by 12.
Enter your exemptions and deductions, as well as any other adjustments you expect to have in the coming year. If you plan to make a contribution to a deductible IRA or health savings account, enter that amount on the 1040 form and use it to adjust your income.
Estimate the amount of taxes that will be withheld from your paycheck during the coming year by multiplying the federal income tax withheld on your paystub by the number of pay periods. If your bank or brokerage firm withholds taxes from your interest and dividends, include that amount as well.
Use the IRS tax table (see the Resources section) to get the total tax due based on your taxable income. Compare that amount to the taxes you expect to be withheld to estimate how much you expect to owe the IRS.
Things You'll Need