For those who make estimated federal tax payments, the first quarter deadline is Monday, April 18

The Internal Revenue Service today reminds those who make estimated tax payments such as self-employed individuals, retirees, investors, businesses, corporations and others that the payment for the first quarter of 2022 is due Monday, April 18.

The 2022 Form 1040-ES, Estimated Tax for Individuals, can help taxpayers estimate their first quarterly tax payment.

Income taxes are a pay-as-you-go process. This means, by law, taxes must be paid as income is earned or received during the year. Most people pay their taxes through withholding from paychecks, pension payments, Social Security benefits or certain other government payments including unemployment compensation.

Most often, those who are self-employed or in the gig economy need to make estimated tax payments. Similarly, investors, retirees and others often need to make these payments because a substantial portion of their income is not subject to withholding. Other income generally not subject to withholding includes interest, dividends, capital gains, alimony and rental income. Paying quarterly estimated taxes will usually lessen and may even eliminate any penalties.

Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers and fishers, casualty and disaster victims, those who recently became disabled, recent retirees and those who receive income unevenly during the year. See Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, and its instructions for more information.

How to pay estimated taxes

Form 1040-ES, Estimated Tax for Individuals, includes instructions to help taxpayers figure their estimated taxes. They can also visit to pay electronically. The best way to make a payment is through IRS Online Account. There taxpayers can see their payment history, any pending payments and other useful tax information. Taxpayers can make an estimated tax payment by using IRS Direct Pay; Debit Card, Credit Card or Digital Wallet; or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). If paying by check, taxpayers should be sure to make the check payable to the “United States Treasury.”

Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, that can be especially helpful to those who have dividend or capital gain income, owe alternative minimum tax or self-employment tax, or have other special situations. assistance 24/7

Tax help is available 24/7 on The IRS website offers a variety of online tools to help taxpayers answer common tax questions. For example, taxpayers can search the Interactive Tax AssistantTax Topics and Frequently Asked Questions to get answers to common questions.

The IRS is continuing to expand ways to communicate to taxpayers who prefer to get information in other languages. The IRS has posted translated tax resources in 20 other languages on For more information, see We Speak Your Language.


IRS YouTube Videos:


SOURCE: IR-2022-77, April 6, 2022

IRS: 7 Tips for making filing easier

7 Tips to make filing easier

  • Organize and gather 2021 tax records including Social Security numbers, Individual Taxpayer Identification Numbers, Adoption Taxpayer Identification Numbers, and this year’s Identity Protection Personal Identification Numbers valid for calendar year 2022.


  • Check for the latest tax information, including the latest on reconciling advance payments of the Child Tax Credit or claiming a Recovery Rebate Credit for missing stimulus payments. There is no need to call.


  • Set up or log in securely at to access personal tax account information including balance, payments, and tax records including adjusted gross income.


  • Make final estimated tax payments for 2021 by Tuesday, January 18, 2022, to help avoid a tax-time bill and possible penalties.


  • Individuals can use a bank account, prepaid debit card or mobile app to use direct deposit and will need to provide routing and account numbers.


  • Learn how to open an account at an FDIC-Insured bank or through the National Credit Union Locator Tool.


  • File a complete and accurate return electronically when ready and choose direct deposit for the quickest refund.

2022 Tax Season: Key filing dates

Tax season is upon us. Here are key filing dates for this year.

  • January 14: IRS Free File opens. Taxpayers can begin filing returns through IRS Free File partners; tax returns will be transmitted to the IRS starting January 24. Tax software companies also are accepting tax filings in advance.
  • January 18: Due date for tax year 2021 fourth quarter estimated tax payment.
  • January 24: IRS begins 2022 tax season. Individual 2021 tax returns begin being accepted and processing begins
  • January 28: Earned Income Tax Credit Awareness Day to raise awareness of valuable tax credits available to many people – including the option to use prior-year income to qualify.
  • April 18: Due date to file 2021 tax return or request extension and pay tax owed due to Emancipation Day holiday in Washington, D.C., even for those who live outside the area.
  • April 19: Due date to file 2021 tax return or request extension and pay tax owed for those who live in MA or ME due to Patriots’ Day holiday
  • October 17: Due date to file for those requesting an extension on their 2021 tax returns

More at

Thursday, Sept. 3 IRS webinar focuses on Opportunity Zones


IR-2020-198, August 31, 2020

WASHINGTON — The Internal Revenue Service is holding a free webinar designed to give an overview of Opportunity Zones and to discuss related tax benefits for investors. Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States.

webinar-IRSThis free 75-minute webinar will take place on Thursday, September 3 at 2 p.m. Eastern Time. It is open to investors, tax professionals, government agencies and anyone else interested in the tax rules that affect Opportunity Zones.

In addition to the overview, topics to be covered include:

  • Investor reporting elections
  • Annual investor reporting requirements
  • Impact of disaster relief on Opportunity Zones

The webinar will feature a live question and answer session and will be closed captioned for viewers who are deaf or hearing impaired. Anyone interested in attending can register online.

For more information on Opportunity Zones, visit the general Opportunity Zones page and the Opportunity Zones Frequently Asked Questions.

Archived versions of past IRS webinars are available at


Originally Published:

Financial safety is an important part of disaster preparedness

checklist for financial safety in a disaster

IRS Tax Tip 2020-99, August 10, 2020

Before a natural disaster strikes, taxpayers are encouraged to prepare, if possible. This includes developing evacuation plans, putting together kits of essential supplies and putting financial safety measures in place. 

To help protect their financial safety in a disaster situation, taxpayers should:

  • Update emergency plans. A disaster can strike at any time. Personal and business situations are constantly evolving, so taxpayers should review their emergency plans annually.
  • Create electronic copies of documents. Taxpayers should keep documents in a safe place. This includes bank statements, tax returns and insurance policies. This is especially easy now since many financial institutions provide statements and documents electronically. If original documents are available only on paper, taxpayers can use a scanner and save them on a USB flash drive, CD or in the cloud.
  • Document valuables. Documenting valuables by photographing or videotaping them before a disaster strikes makes it easier to claim insurance and tax benefits, if necessary. has a disaster loss workbook that can help taxpayers compile a room-by-room list of belongings.
  • Know what tax relief is available in disaster situations. Information on Disaster Assistance and Emergency Relief for Individuals and Businesses is available at Taxpayers should also review the itemized deduction for casualty and theft losses. Net personal casualty and theft losses are deductible only to the extent they’re attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster.
  • Remember the IRS is ready to help. In the case of a federally declared disaster, people can visit Around the Nation on and click on their state to review the available disaster tax relief. Taxpayers who live in counties qualifying for disaster relief receive automatic filing and payment extensions for many currently due tax forms and don’t need to contact the agency to get relief. People with disaster-related questions can call the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster issues. They can request copies of previously filed tax returns and attachments by filing Form 4506, order transcripts showing most line items through Get Transcript on or call 800-908-9946 for transcripts.

More information:

Originally published:

COVID-19 Update

We want you to know that Ballast Tax and Business Services is taking all the necessary precautions to keep business running as usual while our communities deal with the spread of the Coronavirus (COVID 19). We’ve issued a protocol to all our Ballast Tax staff for keeping the workplace clean and safe and for the best interest of employee and client health.

  • Our accountants will be replacing all in-person meetings for the foreseeable future with either a web meeting (via or conference call. We would be happy to provide further instructions for this type of meeting.  
  • While we traditionally still receive some tax forms via hardcopy in the mail, we are asking that all clients who are able, please scan your return and electronically submit paperwork through our secure portal.

  • If you are unable to scan your documents, please note that we will delay processing any hand-mailed paperwork we receive for at least a week, to avoid potential virus transmission on surfaces.

  • We will be suspending our receipt of cash payments, but will continue to accept payment by check, money order, and all major credit cards.

  • We will be automatically filing extensions for all individual returns as we away a formal tax deadline extension from the IRS.

  • In the event that our offices were to close, Ballast Tax and Business Services can meet your service needs under many different circumstances. Our accountants have the ability to work remotely using our secure access technology to continue to serve you.
  • We have technology that shifts our main phone service line to cellphones, so you should continue to call Ballast Tax and Business as usual.
  • We will keep you informed of any changes and potential extensions the IRS may make as things develop.

If you need any additional information on some best practices to reduce the spread, please read best practices issued by the CDC.

Thank you for your cooperation.

Tax Calculation

What is tax calculation?

Tax calculation is the process by which you figure out how much you owe in income tax. If you file federal income tax Form 1040, you must compute your adjusted gross income (AGI) and your taxable income before you can calculate your tax. Essentially, your AGI is your total income minus certain adjustments. Your taxable income is your AGI minus your itemized deductions (or your standard deduction) and your exemptions. (Personal exemptions have been suspended for 2018 to 2025.)

After finding your taxable income, you need to determine your income tax liability from the tax table or the tax rate schedules. This tax amount is then reduced by certain credits you may be entitled to and increased by any other taxes you may owe. In terms of tax calculation and tax planning, certain taxes deserve particular note: the alternative minimum tax, the capital gains tax, and the self-employment tax.

How do you determine your adjusted gross income (AGI)?

AGI is your total income minus any adjustments, including the following:

  • Educator expenses (up to $250 in qualified expenses for eligible educators)
  • IRA deduction for you and for your spouse
  • Deduction for moving expenses (generally suspended for 2018 to 2025)
  • Deduction for employer portion of your self-employment tax
  • Self-employed health insurance deduction
  • Deduction for Keogh, SEP, and SIMPLE retirement plan contributions
  • Penalty on early withdrawal of savings
  • Alimony paid (pre-2019 divorce, unless divorce agreement provides otherwise)
  • Student loan interest deduction
  • Health savings account (HSA) deduction
  • Tuition and fees (qualified tuition deduction)*

Other less common adjustments are also available, including:

  • Archer MSA deduction
  • Certain expenses of qualified performing artists
  • Jury duty pay given to your employer
  • Reforestation amortization and expenses
  • Certain required repayments of supplemental unemployment benefits
  • Contributions to a Section 501(c)(18)(D) pension plan
  • Certain expenses from the rental of personal property
  • Contributions by certain chaplains to Section 403(b) plans
  • Attorney fees and court costs for actions involving certain unlawful discrimination claims

*Not available after 2017 unless extended by Congress.

How do you determine your taxable income?

To figure the amount of your taxable income, you must first subtract either your itemized deductions or your standard deduction from your adjusted gross income (AGI). Next, you subtract your exemptions. (Personal exemptions have been suspended for 2018 to 2025.) Whether or not you itemize deductions, you may also subtract a qualified business income deduction from your AGI.


You can choose to itemize your deductions on Schedule A (Form 1040) or take the standard deduction.

  • Itemized deductions: You can itemize your deductions (such as medical expenses, taxes, mortgage interest, and casualty losses) on Schedule A (Form 1040). You can benefit from itemizing your deductions on Schedule A if you have total itemized deductions that are more than the highest standard deduction amount to which you otherwise are entitled. Note, however, that in years 2013 to 2017, itemized deductions may be limited for taxpayers with high AGIs.
  • Standard deduction: The standard deduction is based on your filing status and whether you are 65 or older or blind. If you were 65 or older or blind during this tax year, you’re entitled to a higher standard deduction than taxpayers under 65 and/or not blind. There are special rules that may eliminate or reduce your standard deduction, such as when your filing status is married filing separate and your spouse itemizes deductions.


Whether you itemize your deductions or use the standard deduction, currently, you can generally deduct $4,050 (for 2016 and 2017) for each exemption you are allowed to claim. However, if your AGI exceeds a specified dollar amount for your filing status, the amount of your deductions and exemptions may be limited or phased out (the phaseout did not apply in 2012). Personal exemptions have been suspended for 2018 to 2025.

How do you determine your tax?

After finding your taxable income, the next step is to figure your income tax liability. This tax amount is then reduced by certain credits to which you may be entitled and increased by any other taxes you owe. Finally, you apply any payments or other credits against your liability to determine whether you owe additional tax or whether you are entitled to a refund.

Tax tables and tax rate schedules are used to ascertain tax. The tax table must be used for taxable income of less than $100,000 (unless Form 8615 or Schedule D is used to calculate tax). The tax rate schedule, however, must be used for taxable income of $100,000 or more (unless Form 8615 or Schedule D is used to calculate tax). Form 8615 is used to calculate the tax for a child’s unearned income that is subject to the kiddie tax rules. Regardless of whether you use the tax table or the tax rate schedule, the amount of tax you pay depends on your tax bracket.

A tax bracket is, generally, the income tax rate at which you are taxed for a certain range of income. Brackets are expressed by their marginal tax rate. Currently, there are seven marginal tax rates: 10, 12, 22, 24, 32, 35, and 37 percent. The income levels at which each rate applies vary depending upon your filing status: married filing separately, married filing jointly, head of household, or single.

What are the current tax rates?

The tax rate schedules for 2019 are as follows:



If Taxable Income Is:

Your Tax Is:

Not over $9,700

10% of taxable income

Over $9,700 to $39,475

$970 + 12% of the excess over $9,700

Over $39,475 to $84,200

$4,543 + 22% of the excess over $39,475

Over $84,200 to $160,725

$14,382.50 + 24% of the excess over $84,200

Over $160,725 to $204,100

$32,748.50 + 32% of the excess over $160,725

Over $204,100 to $510,300

$46,628.50 + 35% of the excess over $204,100

Over $510,300

$155,798.50 + 37% of the excess over $510,300

Married filing jointly and surviving spouses:


If Taxable Income Is:

Your Tax Is:

Not over $19,400

10% of taxable income

Over $19,400 to $78,950

$1,940 + 12% of the excess over $19,400

Over $78,950 to $168,400

$9,086 + 22% of the excess over $78,950

Over $168,400 to $321,450

$28,765 + 24% of the excess over $168,400

Over $321,450 to $408,200

$65,497 + 32% of the excess over $321,450

Over $408,200 to $612,350

$93,257 + 35% of the excess over $408,200

Over $612,350

$164,709.50 + 37.6% of the excess over $612,350

Married individuals filing separately:


If Taxable Income Is:

Your Tax Is:

Not over $9,700

10% of taxable income

Over $9,700 to $39,475

$970 + 12% of the excess over $9,700

Over $39,475 to $84,200

$4,543 + 22% of the excess over $39,475

Over $84,200 to $160,725

$14,382.50 + 24% of the excess over $84,200

Over $160,725 to $204,100

$32,748.50 + 32% of the excess over $160,725

Over $204,100 to $306,175

$46,628.50 + 35% of the excess over $204,100

Over $306,175

$82,354.75 + 37% of the excess over $306,175

Heads of household:


If Taxable Income Is:

Your Tax Is:

Not over $13,850

10% of taxable income

Over $13,850 to $52,850

$1,385 + 12% of the excess over $13,850

Over $52,850 to $84,200

$6,065 + 22% of the excess over $52,850

Over $84,200 to $160,700

$12,962 + 24% of the excess over $84,200

Over $160,700 to $204,100

$31,322 + 32% of the excess over $160,700

Over $204,100 to $510,300

$45,210 + 35% of the excess over $204,100

Over $510,300

$152,380 + 37% of the excess over $510,300

Trusts and estates:


If Taxable Income Is:

Your Tax Is:

Not over $2,600

10% of taxable income

Over $2,600 to $9,300

$260 + 24% of the excess over $2,600

Over $9,300 to $12,750

$1,868 + 35% of the excess over $9,300

Over $12,750

$3,075.50 + 37% of the excess over $12,750

How do the long-term capital gains tax rates come into play?

Currently, the highest marginal tax rate applicable to ordinary income and short-term capital gains of individuals is 37 percent, whereas the top long-term capital gains rate for individuals is 20 percent for most long-term capital gains. Because of this difference, you need to complete a special capital gains tax worksheet to calculate your capital gains tax.

Long-term capital gains and qualified dividends are generally taxed at special capital gains tax rates of 0 percent, 15 percent, and 20 percent depending on your taxable income. The actual process of calculating tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income. These rates also generally apply to qualified dividends paid to individuals from domestic corporations and qualified foreign corporations.

What about the alternative minimum tax (AMT)?

The purpose of the alternative minimum tax (AMT) is to ensure that taxpayers with substantial income will not escape taxation entirely by employing certain exclusions, deductions, and credits. The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax: the AMT.

What about the self-employment tax?

If you are self-employed, you must pay Social Security and Medicare taxes for yourself as part of your income tax. The self-employment tax is based on net earnings from self-employment, not on taxable income. The rate on net earnings is 15.3 percent; 12.4 percent is for Social Security and 2.9 percent is for Medicare. The maximum amount subject to the Social Security part is currently $132,900 (up from $128,400 in 2018). All of your net earnings of at least $400 are subject to the Medicare tax.

You generally must report and pay self-employment tax (Schedule SE of Form 1040) if either of the following applies to you (or to your spouse, if you file a joint return):

  • You were self-employed and your net earnings from self-employment were $400 or more
  • You had church employee income of $108.28 or more

For tax years after 2012, a 0.9 percent Medicare surtax also applies to wages and self-employment income in excess of $200,000 for single taxpayers and over $250,000 for married couples filing joint returns ($125,000 for married couples filing separate returns).

What are some other taxes that might affect you?

  • Social Security and Medicare tax on tips not reported to employer: If you received tips of $20 or more in any month while working for one employer but didn’t report all of them to your employer, you must figure your Social Security and Medicare tax on the tips not reported. Use Form 4137 and attach it to Form 1040.
  • Household employment taxes: If you have a household employee, you may need to pay state and federal household employment taxes. You generally must add your federal employment taxes to the income tax that you report on your federal income tax return. Household work is work done in or around your home by baby-sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. A household worker is your employee if you can control not only what work is done but also how it is done. If you have a household worker, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both. For more information, see IRS Publication 926, or Schedule H and its instructions.
  • Premature distribution tax: If you take a distribution from your qualified plan before you reach age 59½, you may have to pay a 10 percent premature distribution tax on that part of the distribution that is taxable (unless you meet an exception). This penalty tax can amount to a substantial sum if your distribution is large.
  • A 20 percent tax on excess (golden parachute) payments: If you received an excess parachute payment (EPP), you may have to pay a tax equal to 20 percent of this excess payment.
  • For tax years after 2012, an additional hospital insurance (Medicare) tax of 0.9 percent: This additional tax will be assessed on wages (as well as self-employment income) that exceed $200,000 ($250,000 for married couples filing joint returns, $125,000 for married couples filing separate returns). Employees will be liable for this amount to the extent that the additional tax has not been withheld from wages.
  • For tax years after 2012, a new unearned income Medicare contribution tax on the investment income of high earners: The 3.8 percent tax will apply to the lesser of (1) net investment income or (2) the amount by which adjusted gross income (AGI) exceeds the $200,000 or $250,000 for married couples filing jointly ($125,000 for married couples filing separate returns) threshold amounts. Net investment income generally includes interest, dividends, capital gains, annuity income, royalties, and rents. Tax-exempt interest won’t be included, nor will income or distributions from qualified retirement accounts.
  • Starting in 2014, a new tax on individuals who don’t have adequate health care coverage (this is often referred to as the individual insurance mandate): This tax will be phased in over three years, starting at the greater of $95, or 1 percent of gross income in 2014 (up to a family maximum of $285); increasing to the greater of $325, or 2 percent of gross income in 2015 (up to a family maximum of $975); and rising to the greater of $695, or 2.5 percent of gross income in 2016 and 2017 (up to a family maximum of $2,085). The individual insurance mandate has been eliminated for months beginning after December 31, 2018.

Understanding Personal Tax Credits

Have you ever thought that you’re paying too much income tax? You may be, if you’re not claiming all of the tax credits for which you are eligible when you file your federal tax return. These credits may significantly reduce your tax liability.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction of your tax liability. Generally, after you’ve calculated your federal taxable income and worked out how much tax you owe, you can subtract the amount of any tax credit for which you are eligible from your tax obligation. In some cases, if your tax credits exceed your tax liability, you will be able to claim the difference as a refund.

What is the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable income, so that when you calculate your tax liability, you’re doing so against a lower amount. Essentially, your tax obligation is reduced by the same percentage as your tax rate.

Here’s an example. If you’re in the 22 percent marginal tax bracket and you have $1,000 in tax deductions, your tax liability will be reduced by $220. That reduction would be greater if you were in a higher tax bracket.

A tax credit, on the other hand, is constant. A tax credit of $100 will reduce your tax liability by $100, regardless of your tax bracket. Here’s a quick summary of some of the main personal federal tax credits that may be available to you.

Child and dependent care credit

If you’re working or looking for work, and you need to pay someone to look after your child or other qualifying individual, you may be eligible for the child and dependent care credit. Depending on your adjusted gross income, you may be able to claim up to 35 percent of the qualifying expenses that you pay to provide care for a dependent child under the age of 13, a disabled spouse, or a disabled dependent. A dollar limit applies to the amount of work-related expenses you can use to figure the credit. This limit is $3,000 for one qualifying person, or $6,000 for two or more qualifying persons.

For more information, see IRS Publication 503.

Child tax credit

The child tax credit provides tax relief for parents and others who have dependent children. If you’re eligible, you may be entitled to take a credit of up to $2,000 per child. A qualifying child is typically a child, grandchild, stepchild, or foster child under the age of 17 who lives with you for more than half the year and provides less than half of his or her own support.

The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level ($400,000 for married persons filing jointly, $200,000 in any other case).

For more information, see IRS Publication 972.

Earned income credit

The earned income credit benefits working taxpayers who have low income. You can apply for it only if you work, either as an employee or in your own business, and you have earned income during the tax year. The amount of the credit is based on your adjusted gross income, your filing status, and the number of qualifying children you have.

For more information, see IRS Publication 596.

Education credits

There are two tax credits that you may qualify for if you, your spouse, or your children are attending an eligible educational institution: the American Opportunity tax credit (formerly known as the Hope credit) and the Lifetime Learning credit. Whether you can claim one of these credits (they can’t both be claimed in the same year for the same student) depends on your educational status, your modified adjusted gross income (MAGI), and the amount of qualified tuition and related expenses you pay in a given year.

The American Opportunity credit is worth a maximum of $2,500 per year and is available for each student in the household who is in the first four years of undergraduate education (provided the student is attending at least half-time). The Lifetime Learning credit is worth a maximum of $2,000 per year and is more widely available — students who are attending college or graduate school (even less than half-time), taking continuing education courses, or pursuing courses connected to hobbies and other interests may be eligible for this credit. However, the Lifetime Learning credit is limited to $2,000 per tax return per year, regardless of how many students in the family may qualify.

To qualify for the full Lifetime Learning credit, your MAGI must be below $58,000 (in 2019, $57,000 in 2018) if you’re a single filer and $116,000 (in 2019, $114,000 in 2018) if you’re a joint filer. Single filers with a MAGI between $58,000 and $68,000 and joint filers with a MAGI between $116,000 and $136,000 can claim a partial credit in 2019.

To qualify for the full American Opportunity credit, your MAGI must be below $80,000 if you’re a single filer and $160,000 if you’re a joint filer. Single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000 can claim a partial credit. (The same dollar limits applied for the 2018 tax year.)

For more information, see IRS Publication 970.

Other tax credits

You may also be eligible for other federal tax credits, including the credits listed below:

  • Adoption tax credit
  • Tax credit for the elderly or the disabled
  • Foreign tax credit
  • Tax credit for IRA and retirement plan contributions (the retirement savings contribution, or “savers” credit)
  • Health insurance premium assistance credit

If you would like more information on personal tax credits, contact your tax advisor or log on to the IRS website at


What is budgeting?

Budgeting is a process for tracking, planning, and controlling the inflow and outflow of income. It is a process that we all begin soon after we get our first spending money. Relying on our overloaded minds to manage such a complex process has many shortcomings. The solution is to analyze your current situation, determine your goals, and develop a written plan against which you’ll measure your progress.

How does the budgeting process work?

The budgeting process begins with gathering the data that makes up your financial history. Next, you use this information to do a cash flow analysis. You will calculate your net cash flow, which tells you whether cash is coming in faster than it’s going out, or vice versa. Then you will determine your net worth. Simply stated, this is the sum of everything you currently own less the sum of everything you currently owe. Having a snapshot of your present financial situation, you’ll then define your financial objectives and create a spending plan to achieve them. Finally, you will periodically check your progress against the plan and make adjustments as needed.

Analyzing cash flow is little more than adding and subtracting

Add up your income, then your expenses, and subtract the latter from the former. The result is your net cash flow. If it is positive (hopefully), you’re earning more than you’re spending. If not, then budgeting is not really an optional process. You must do it to avoid losing more ground financially. To the extent that you can make cash flow strongly positive, you will be able to save for upcoming needs and investments.

Is net worth growing or declining?

Your net worth shouldn’t be a mystery. To determine what it is, you simply add up the current value of your assets (the things you currently own), and then subtract the total of your liabilities (what you currently owe). The idea, if you haven’t guessed it, is that your net worth should grow from year to year, barring unforeseen setbacks.

Know where you stand, turn to the future, and set your goals

You might have one or more major savings needs goals in mind, but now is the time to look at all your anticipated financial needs, including your cash reserve, and determine your goals. Knowing what all of your goals are enables you to create the best plan to achieve those objectives over the long term. While you may not be able to achieve all of your goals simultaneously, having a plan in place will help as you work toward your future goals.

Create a spending plan that fits your resources and objectives

Once you know where you stand financially and the goals you hope to achieve, you are in a position to design a plan that will move you expeditiously in that direction. You will know how aggressive you need to be in order to achieve the objectives you set, and therefore you can design a plan that fits both your resources and objectives.

Just as with a plan that falls short of delivering on your goals, a plan that is overly aggressive relative to your resources is likely to lead to budget frustration. Keeping goals aligned with objectives is a critical part of the process and essential to budgeting successfully.

Remember that it is a plan and that plans change as needed

Flexibility is always an important ingredient in the planning process. As life’s circumstances change, as they inevitably will, you will need to adjust your spending plan accordingly. The important point is that the budgeting process keeps you abreast of how these changes are occurring and allows you to make changes as you find them appropriate to your needs and resources.

Budgeting can be a temporary or a permanent habit

It may be that your present financial situation calls for the short-term control that budgeting can provide. Alternatively, you may find that budgeting gives you a level of control over your finances that you’d prefer to maintain over the long term. If the latter is true, you should make it a lifelong habit.

Tax Planning for Income

tax return
You don’t want to pay more in federal income tax than you have to. With that in mind, here are five things to consider when it comes to keeping more of your income.

1. Postpone your income to minimize your current income tax liability

By deferring (postponing) income to a later year, you may be able to minimize your current income tax liability and invest the money that you’d otherwise use to pay income taxes. And when you eventually report the income, it’s possible that you’ll be in a lower income tax bracket.

Certain retirement plans can help you postpone the payment of taxes on your earned income. With a traditional 401(k) plan, for example, you contribute part of your salary into the plan, paying income tax only when you later withdraw money from the plan (withdrawals before age 59½ may be subject to a 10 percent penalty tax in addition to regular income tax, unless an exception applies). This allows you to postpone tax on part of your salary and take advantage of the tax-deferred growth of any investment earnings.

There are many other ways to postpone your taxable income. For instance, you can contribute to a traditional IRA, buy permanent life insurance (the cash value part grows tax deferred), or invest in certain savings bonds. You may want to speak with a tax professional about your tax planning options.

2. Shift income to family members to lower the overall family tax burden

You may also be able to minimize your federal income taxes by shifting some income to family members who are in a lower tax bracket. For example, if you own stock that produces dividend income, one option might be to gift the stock to your children. After you’ve made the gift, the dividends will represent income to them rather than to you, potentially lowering your family’s overall tax burden. Keep in mind that you can make a tax-free gift of up to $15,000 (in 2018 and 2019, and could increase in future years) per year per recipient without incurring federal gift tax.

However, look out for the kiddie tax rules. Under these rules, for children under age 18, or children under age 19 (or full-time students under age 24) who don’t earn more than one-half of their financial support, any unearned income over $2,200 (in 2019, $2,100 in 2018) is taxed using the trust and estate income tax brackets. Also, be sure to check the laws of your state before giving securities to minors.

Other ways of shifting income include hiring a family member for the family business and creating a family limited partnership. Be sure to investigate all of your options carefully before acting.

3. Deduction planning involves proper timing and control over your income

Part of minimizing federal income tax is about taking advantage of all deductions to which you are entitled, and timing them in the most beneficial manner.

As a starting point, you’ll have to decide whether to itemize your deductions or take the standard deduction. Generally, you’ll choose whichever method lowers your taxes the most. If you itemize, be aware that some deductions (for example, medical expenses) are allowed only to the extent the deduction exceeds some percentage of your adjusted gross income (AGI). In cases where your deductions are affected by your AGI, you might look at ways to potentially increase your allowable deductions by reducing your AGI. To lower your AGI for the year, you can defer part of your income to next year, buy investments that generate tax-exempt income, and contribute as much as you can to qualified retirement plans.

Because you can sometimes control whether a deductible expense falls into the current tax year or the next, you may have some control over the timing of your deduction. If you’re in a higher federal income tax bracket this year than you expect to be in next year, you’ll want to consider accelerating deductions into the current year. You can accelerate deductions by paying deductible expenses and making charitable contributions this year instead of waiting until next.

4. Investment tax planning uses timing strategies and focuses on your after-tax return

You can also minimize tax by making tax-conscious investment choices. Potential strategies can include the use of tax-exempt securities and intentionally timing the sale of capital assets for maximum tax benefit.

Although income is generally taxable, certain investments generate income that’s exempt from tax at the federal or state level. For example, if you meet specific requirements and income limits, the interest on certain Series EE bonds (these may also be called Patriot bonds) used for education may be exempt from federal, state, and local income taxes. Also, you can exclude the interest on certain municipal bonds from your income (tax-exempt status applies to income generated from the bond; a capital gain or loss realized on the sale of a municipal bond is treated like a gain or loss from any other bond for federal tax purposes). And if you earn interest on tax-exempt bonds issued in your home state, the interest will generally be exempt from state and local tax as well. Keep in mind that although the interest on municipal bonds is generally tax exempt, certain municipal bond income may be subject to the federal alternative minimum tax. When comparing taxable and tax-exempt investment options, you’ll want to focus on those choices that maximize your after-tax return.

In most cases, long-term capital gain tax rates are lower than ordinary income tax rates. That means that the amount of time you hold an asset before selling it can make a big tax difference. Since long-term capital gain rates generally apply when an asset has been held for more than a year, you may find it makes good tax-sense to hold off a little longer on selling an asset that you’ve held for only 11 months. Timing the sale of a capital asset (such as stock) can help in other ways as well. For example, if you expect to be in a lower income tax bracket next year, you might consider waiting until then to sell your stock. You might want to accelerate income into this year by selling assets, though, if you have capital losses this year that you can use to offset the resulting gain.

Note: You should not decide which investment options are appropriate for you based on tax considerations alone. Nor should you decide when (or if) to sell an asset solely based on the tax consequence. A financial or tax professional can help you decide what choices are right for your specific situation.

5. Year-end planning focuses on your marginal income tax bracket

Year-end tax planning, as you might expect, typically takes place in October, November, and December. At its most basic level, year-end tax planning generally looks at ways to time income and deductions to give you the best possible tax result. This may mean trying to postpone income to the following year (thus postponing the payment of tax on that income) and accelerate deductions into the current year. For example, assume it’s December and you know that you’re in a higher tax bracket this year than you will be in next year. If you’re able to postpone the receipt of income until the following year, you may be able to pay less overall tax on that income. Similarly, if you have major dental work scheduled for the beginning of next year, you might consider trying to reschedule for December to take advantage of the deduction this year. The right year-end tax planning moves for you will depend on your individual circumstances.