Mid-Year Financial Review: Taxes

July 11, 2014 | Kate Horrell

You know how I like to review my family’s finances each new year?  Well, I also like to do a little mid-year review, and look over various aspects of our financial situation.  The primary purpose is to make sure we are on track to have the right amount of estimated taxes withheld, but it also helps me to re-focus on our financial goals for the year.

But the taxes are the important part.

Our tax system consists of withholding throughout the year, and then a balancing out at the end of the year when you submit your tax return.  Unfortunately, the calculators that figure your withholding are simple and inflexible, and they assume that your income is relatively consistent across the year.  For military families, with deployments to tax-free combat zone areas, and spouses taking and leaving jobs, and sometimes rental income (or loss) from a house at their last duty station, the withholding calculators can be inaccurate.  Inaccurate withholding means that you might get a large tax refund, or owe a large tax bill.  Neither is perfect.  The goal is to be as close to the right withholding as possible.

The best way to get your withholding right is to review your tax situation throughout the year.  I strive to do it quarterly, but in uncomplicated years, a mid-year review should be enough.

1.  Hop online and get whatever tax form you will file.  You’ll have to use last year’s form, and that’s OK.  We file the Form 1040, which can be found at http://www.irs.gov/pub/irs-pdf/f1040.pdf

2.  Pull up or print off the service member’s June Leave and Earnings Statement (LES) and grab the most recent pay stubs for any other jobs that might contribute to the family’s income.  Since we’re at mid-year, most of us will just use those figures and multiply by two.  However, you’ll have to make adjustments for whatever things you know have been or will be different.  This includes things like if the spouse started a job in March and intends to keep it through the rest of the year, or if the military member knows that they will be getting paid for E-6 in October.

3.  Using the pay stubs, the LES, and what you know about your family’s finances, estimate your income for the year and put it on the form.  Then, estimate all the adjustments to income that you’ll have.  If you are not sure, you can just use your figures from last year.  However, be sure to modify anything that you know is wrong.  Let’s say you have a rental property that broke even last year, but it was vacant for two months so far this year.  Adjust the figures for your Schedule E to reflect that lower rental income for the year.  This is a balance:  you want to get as close as possible without making yourself crazy, and it’s never going to be perfect.

4.  Complete the rest of the tax return form, using your estimated income for the year.  When you get near the end, take the amount you’ve had withheld so far and, again, either double it, or do whatever adjustments need to be done to accurately reflect what your estimated withholding will be for the year if you keep the withholding information the same.

5.   What does this calculation project for your final status?

If you are estimated to get a large refund, you want to lower the amount you are having withheld from your paychecks.  For the military member, you can do this via the MyPay system.  For non-military jobs, you can do this by filing a new W-4 Withholding form with your employer.

If your estimates show that you will owe a large tax bill, you need to increase the amount you are having withheld.   If you are self-employed, or own a small business on the side, this might mean submitting estimated quarterly withholding to the IRS.  Military members can increase their withholding via the MyPay system.  Non-military folks can submit a new W-4 Withholding form to their payroll office, or use your employers online system.

This little project will take some time.  I’ve been working on it for over an hour, but most of that has been fighting with my printer.  However, it will be worth it.  Since I implemented this process, we’ve never been more than a few hundred dollars off with our tax withholding, and that includes lots of time in and out of combat zones, promotions, and my ever-fluctuating small business income.  Heck, last year, I was only off by $80 on a tax bill that was much, much larger than any tax bill we’ve had before.

A little effort now will make life so much easier when you go to prepare your taxes for 2014.

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This post is part of our mid-year financial review series:

Mid-Year Financial Review:  Taxes

Mid-Year Review:  Regular Spending

Mid-Year Review:  GI Bill Benefits Transfer

Mid-Year Review:  Verify Your GI Bill Benefits Transfer