Updated March 2021
The best way to avoid a nasty surprise on the amount owed for tax return – or a terse letter from the IRS– is to do a rough tax projection. This process produces an estimate of what is owed so you can make smart decisions about cash flow and take steps to qualify for more deductions and credits. The earlier you start, the better – most tax pros suggest doing this in November so there’s still time in the tax year to take action.
Do I need tax prep help?
Deductions, credits and tax rules are confusing and preparing a tax estimate can be time-consuming. For many older adults and family caregivers, it makes sense to engage a tax professional or recognized tax prep software solution to do the work. The IRS's Volunteer Income Tax Assistance (VITA) program offers free basic tax prep to people who generally make $57,000 or less, persons with disabilities and taxpayers with limited English language skills.
The agency’s Tax Counseling for the Elderly (TCE) program provides similar services for people age 60 and older, including consulting on pension and other retirement-related issues. Find free tax prep near you at IRS.gov.
What information should I gather?
Whether you hand off to a tax preparer, rely on software or use another method, you need to gather data and documentation on:
Social Security, annuity or pension payments; other income, estimated dividends and/or interest from investments, bank accounts and CDs; and capital gains or losses.
Mortgage interest, real estate taxes, state income tax paid the previous year, estimated tax payments made during the year, tax preparation fees, and miscellaneous expenses such as safe deposit boxes or investment fees, and charitable contributions. These expenses may qualify for deductions or credits.
Medical and Dental Expenses:
Out-of-pocket payments for doctors, dentists, labs, physical therapy, medical equipment, prescription drugs, and premiums for Medicare and supplemental insurance and miles driven for medical care. You may be able to claim deductions for these medical expenditures.
Plug these dollar amounts into your estimate software or tax preparer’s organizer to get a preliminary picture of your tax situation.
How can I tell if there’s enough money to pay the tax due?
If you or your loved one owes money, talk to an accountant about how you can reduce liability, including making certain purchases before tax year-end.
Once you know the final estimate of tax due, review bank accounts and cash flow projections to determine if there will be enough money to cover the bill. Your tax pro and banker or financial advisor can help you explore options to increase cash on hand.
While you can file for an extension, that doesn’t mean you can put off payment. Any estimated tax due must be paid by Tax Day (usually April 15) to avoid stiff penalties, including a one-time penalty, accrued interest and monthly fines on the amount due for each month your return is tardy up to 25%. Get more information on how to file a tax extension at IRS.gov.
Even if you don’t have time to do a projection for the prior tax year, you can get ready to do one for this year. Follow these steps to have the data and documents you need to prepare a projection later this year. Good luck!
This information is not intended as a substitute for professional financial, accounting, tax or legal consultation; it is provided “as is” without any representations or warranties, express or implied. Always consult professionals when you have specific questions about any financial matter.