How will my tax situation change if… ?

The tax code is a mess. I wish it weren’t, but it is. And one of the most frustrating aspects of that mess is that it makes it very difficult to do any kind of tax planning for the current year. You’d think there would be an easy way to know (or at least estimate) how your tax situation will change if something about your financial situation changes, right? In most cases, there isn’t.

  • How much will I save if I put money into an IRA?
  • How can I make sure I don’t owe anything next year?
  • Do I need to start paying estimated taxes if I rent out a room in my house?
  • If I buy a house, can I change my W-4 to have less withheld from my paycheck?
  • I’m getting married. Is there a “marriage penalty” that I should be worried about?

It generally takes a lot of work to answer these kinds of questions. In many cases, it’s more difficult than preparing a tax return, due to the huge number of variables and the degree of uncertainty involved in estimating your income and deductions for the year. It can be impossible to answer any question like this without knowing everything about your tax situation and all the associated numbers, Jan 1 through Dec 31. Do you know in advance if you’ll be getting an end-of-year bonus? Will you be selling any of your investments in December, and if so, what will the profit/loss be? Are you going to switch jobs later in the year? You get the idea.

Your best (or first) option may be to use an online income tax calculator or W-4 calculator. Play around with the numbers, see what happens. If nothing else, it’ll help you get a handle on all of the information you’d need to provide me in order for me to run the numbers for you.

If you do decide to have me run a projection/estimate for you, you should assume it’ll take me at least 1 1/2 to 2 hours to get all the information from you, run the numbers, and communicate the results – which will only be as reliable as the information you’ve given me. Expect that my fee would end up in the vicinity of $200, depending on the complexity of the situation. Is it worth it? In most cases, probably not.

Alternative: If I prepared your tax return for you for the previous year, and all you need is for me to change one number and let you know what the change to the bottom line would have been, that’s usually a straightforward process for me. I can often answer those kinds of questions with only 10-15 minutes of work. (For example, “How much would my taxes have changed last year if I had put $4,000 into a college savings plan?”) But please note the use of past tense. It’s relatively easy for me to give you an answer about what would have happened last year, since I already have everything entered into my software as part of preparing your tax return. Everything’s concrete; no variables or uncertainty. All I need to do is change one or two numbers and then re-calculate. I’ll provide an answer, and then you can decide for yourself if your tax situation for the current year is similar enough to the previous year for my answer to remain applicable.

That is, there’s a big difference between “How much will I owe if…” and “How much would I have owed if…

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