Has your gross income increased recently? If so, you should note a few things to stay ahead of the game come tax time. For high-income earners, it’s important to have a solid tax strategy to take advantage of all the deductions and credits available to you. Here are five things to remember as you plan your taxes for this year.
1. Review Your Withholding
Reviewing your withholding is one of the most important tax strategies for high income earners because it can significantly impact your tax bill. If your income has increased, you may need to adjust your withholding so that you don’t owe a large sum of money come tax time. You can use the IRS Withholding Calculator to help determine the right amount of withholding for your situation.
If you find that you are under-withheld, you can adjust your withholding by submitting a new W- four form to your employer. On the other hand, if you are over-withheld, you will likely get a refund when you file your taxes.
While getting a refund may be nice, it’s better to have too little withheld than too much because it means you’ve loaned the interest-free government money throughout the year.
2. Invest in a Retirement Account
Consider increasing your annual contributions if you have a 401(k) or another employer-sponsored retirement plan. Not only will this reduce your taxable income, but it will also help you save for the future. If you don’t have access to an employer-sponsored retirement plan, you can still open an IRA and make contributions up to $6000 for the year.
Remember, the sooner you start saving for retirement, the better off you’ll be down the road. So if your income has increased, take advantage of it by upping your retirement savings.
401(k)s and IRAs aren’t the only way to save for retirement. If you’re self-employed or have other income outside of a regular job, you can open a Solo 401(k) or SEP IRA. These retirement accounts have higher contribution limits than traditional IRAs, so they’re a great way to save even more for the future.
No matter what type of retirement account you choose, remember to take advantage of any employer-matching contributions. This free money can help you boost your retirement savings even more.
3. Consider Saving for Other Goals
If you have a good handle on your retirement savings, you may want to start saving for other goals, like a down payment on a house or a new car. Or, if you’re debt-free, you could start stashing away money for a rainy day fund.
Saving for these goals is important because it can help you reach financial security more quickly. Plus, it can give you peace of mind knowing that you have an emergency fund to cover unexpected expenses. If your income has increased, now is the perfect time to start working towards these other financial goals.
One easy way to save for these goals is to set up automatic transfers from your checking account to your savings account. This way, you can make saving a painless process and ensure that you’re always making progress towards your goals.
4. Stay Mindful of Your Spending
Just because your income has increased doesn’t mean you need to start spending more. It’s important to stay mindful of your spending habits so that you don’t find yourself in debt down the road.
One way to do this is to create a budget and track your expenses for a month or two. This will help you see where your money is going and identify areas where you may be able to cut back. Once you understand your spending patterns better, you can make adjustments to ensure that your spending aligns with your financial goals.
5. Review Your Insurance Coverage
If your income has increased, reviewing your insurance coverage is a good idea to ensure that you’re still adequately protected. For example, if you’ve recently started a family, you may need to increase your life insurance coverage. Or, if you’ve purchased a new home or car, you may need to adjust your homeowners or auto insurance policy.
Increasing gross income is an exciting time as it opens up new opportunities to save and invest for the future. However, it’s important to be mindful of your spending and ensure that you’re still protecting yourself against financial risks. By following these tips, you can make the most of your increased income and secure your financial future.