5 Simple Steps to Estimating Your Taxes
Tax season can feel overwhelming, but understanding how to estimate your taxes can provide clarity and confidence. Whether you’re curious about how much you might owe or if you’re considering ways to save, knowing how taxes work is essential.
This guide will walk you through a straightforward process for estimating your taxes when taking the standard deduction. Plus, we’ll explore how making contributions to retirement accounts or understanding the difference between tax deductions and credits can help reduce what you owe.
Why Estimating Your Taxes Matters
Having a good sense of your taxes lets you take control of your finances. It’s not just about knowing what you might owe; it’s about making informed decisions, such as saving for retirement or planning major expenses. By following these simple steps, you’ll not only estimate your taxes, but you’ll also gain insight into strategies that could reduce your tax burden.
Step-by-Step Guide to Estimating Taxes
- Start With Your Tax Status
Begin by determining your tax filing status. This could be single, married filing jointly, head of household, or one of the other categories outlined in tax tables like the LPL Quick View Tax Guide. Your filing status determines your standard deduction and tax rate brackets. - Find Your Standard Deduction
Once you’ve identified your filing status, locate the standard deduction for that status. If you’re using the LPL Quick View Tax Guide, this information is on page 5. The standard deduction is the amount you subtract from your gross income to determine your taxable income. - Subtract the Standard Deduction From Your Gross Income
Take your gross income (your total income before taxes) and subtract the standard deduction. This gives you your taxable income. For example, if you earned $60,000 in gross income as a single filer and the standard deduction is $13,850, your taxable income would be $46,150. - Match Your Taxable Income to the Tax Brackets
Using the tax guide, locate the tax bracket where your taxable income falls under your filing status. - Perform the Necessary Calculation
- Write down the Flat Amount for the bracket your taxable income fits into.
- Subtract the “Over” column amount from your taxable income to find the remaining balance.
- Multiply this remaining balance by the percentage (% symbol) listed in your tax bracket.
- Finally, add the Flat Amount to the result from the step above to calculate your estimated tax.
For example, if your taxable income is $46,150 and your bracket indicates a Flat Amount of $4,000, a percentage of 22%, and an “Over” amount of $44,725, here’s what you’d do:
- Subtract $44,725 from $46,150 = $1,425.
- Multiply $1,425 by 22% = $313.50.
- Add $4,000 to $313.50 = $4,313.50.
Your estimated tax is approximately $4,314.
Exploring Tax-Saving Opportunities
Have you considered how saving for retirement could reduce your taxes? Contributions to a Traditional IRA or a 401(k) can be deducted from your gross income, lowering your taxable income. For instance, if you contribute $5,000 to a retirement plan, you reduce your gross income by the same amount. Going back through the steps above with this new gross income, you’ll see how much your contributions save you in taxes.
Run the numbers both with and without these contributions to compare your tax savings. This exercise can offer a new perspective on how saving for your future also minimizes your tax burden today.
Tax Deductions vs. Tax Credits
Tax deductions and tax credits can both reduce your tax bill, but they work in different ways.
- Tax Deductions lower your taxable income. For example, if you have $50,000 in gross income and a $2,000 deduction, your taxable income becomes $48,000.
- Tax Credits, on the other hand, directly reduce the taxes you owe. For example, if you calculate your tax as $4,000 and qualify for a $1,000 tax credit, you only owe $3,000.
Some common credits include the Child Tax Credit, Education Credits, and even credits for Traditional Long-Term Care Partnership plans.
Take Control of Your Financial Future
Taxes don’t have to be confusing or stressful. With the right tools and strategies, you can gain clarity and make decisions that support your financial goals. If you’re ready to approach tax planning, retirement savings, or risk management with confidence, it’s time to consider a partner who can guide you every step of the way.
Schedule a consultation with Norris Davis at South Platte Investments and Planning today. Whether you need a second opinion on your financial strategy or a comprehensive plan for the future, Norris and his team are here to help. Don’t wait to take the next step in building a strong financial foundation.
Why Choose South Platte Investments and Planning?
Tax planning is just one piece of the puzzle when it comes to reaching your financial goals. At South Platte Investments and Planning, Norris Davis understands the complexities of financial management and focuses on empowering clients to make intelligent, informed decisions. Whether you’re a big thinker with bold financial ambitions or someone just looking for help demystifying the numbers, this is the level of expertise you can trust.
With a personalized approach, South Platte Investments offers services that include financial planning, wealth management, and insurance planning. They specialize in assisting professionals who’ve built their net worth through company stock but need guidance in reducing risk and planning effectively.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.