Start Projecting Your 2026 Taxes Now

Now that tax season is officially behind us, it is time to start working on your 2026 taxes in earnest.  Hopefully you have already been planning ahead, but either way, there is still time to make meaningful changes and set yourself up for success come tax time next year.  Your goal is to avoid surprises, particularly owing more taxes than expected.  

The most common question I get from folks when finishing their tax return is, “Why do I owe so much?”  This recently happened when someone owed less than $500, while that same week someone else was thrilled to only owe around $70k because they planned to owe approximately $100k.  There lies the difference:  projecting.

Usually the answer to “why do I owe?” can be gleaned from the prior-year comparison chart I include with every tax return I prepare (assuming the prior-year data exists and is available).  You can see where your income, deductions, withholdings, and payments stayed the same, increased, and/or decreased compared to the prior year.  Perhaps you owed this year instead of receiving your normal refund because you took a large IRA distribution, withheld 10% in federal tax, withheld no state tax, and have overall income that puts you in the 24% federal and 6% state tax brackets.  

Unfortunately that benefit of hindsight only explains what happened; it does not prevent it from happening beforehand, or even for the next year.  You need to take action now to make your taxes more predictable.  

Sit down and list all your income:  every W-2 job, every side hustle, every brokerage account, every crypto platform, every investment, and every other source of money you have.  (Did you sell a vacation property or win a scratch-off?)  Be sure to include an item even if you think it is nontaxable.  You can figure out which items are taxed later in the projection process, but for now it is important to avoid missing a piece of the puzzle.  

• A common mistake here is inherited IRAs.  Receiving an inheritance is generally tax-free, but that tax-free-inheritance concept usually does not extend to inherited IRAs, which come with complicated rules surrounding distributions. 

Next, list deductions you plan to take:  property taxes and mortgage interest paid, charitable donations, childcare expenses, IRA contributions (be sure to identify them as Roth or traditional!), energy-efficient home improvements, and whatever else you have planned.  As with income, list your planned deductions even if you are not sure it is deductible.  You might end up surprised!  Every year I get someone who did not realize that their new windows qualify for a tax credit, while someone else is disappointed that their GoFundMe donation to a worthy cause is nondeductible.  For example, the person I described above who was surprised at owing $500 ended up owing because their projected business expense total had included several nondeductible personal items.  

After outlining your income and deduction items, list your federal and state tax payment sources.  For most folks this is just their W-2 withholdings, but some folks also have taxes withheld from IRA or 401k distributions, and some make estimated tax payments throughout the year.  If you applied all or part of an overpayment of your 2025 taxes towards 2026, that goes on the list as well.  

• Another common mistake that folks make is not including an IRA distribution in their computations because they “had taxes taken out” when receiving the distribution.  However, IRA distributions do not exist in a vacuum—they get added together with all other income and withholdings to determine your tax liability, and usually the default withholdings that brokerages use end up falling short of what is actually needed.

The final step to projecting your tax liability involves some math.  You need to reasonably estimate the amount of each of those items.  For donations that is easy:  just add them up.  For your W-2 wages, it is a little more nuanced.  Look at your last pay stub, figure out your projected earnings and tax payments for the rest of the year, and add those amounts to the current year-to-date totals.  Be sure to pay attention to the pay period and paycheck dates, too, because W-2 income counts when it is paid, not necessarily when it is earned.  

• I suggest erring on the side of caution to give yourself a bit of wiggle room here.  Estimate a bit high on the income side and a bit low on the payments side.  

Once your projections are complete, you can use these figures to compute your tax liability.  Then compare your tax liability to your tax payments.  If your payments exceed your liability, you will have a refund, but if your liability exceeds your payments, you will owe tax.  

If you will owe tax—or if you simply want to give yourself an additional buffer—you have some additional work to do.  You can make additional payments through increased withholdings from your W-2 job or retirement distributions, estimated tax payments, or both.  Another option is to simply stockpile the extra money you need and plan to pay it when you file your tax return or go on extension, but realize that waiting to pay it all at the end could still leave you exposed to underpayment penalties for not paying in enough tax throughout the year.  Either way, start taking those extra steps now.  Getting ahead beats being reactive.  Finish in a place that you plan to be in advance rather than simply ending up unprepared.  

Done properly, taxes are a year-round endeavor, not just an annual event.  At Phippen Tax, we encourage folks to engage us for tax projections in addition to just tax filing.  Better yet, take it a step further and do some proactive planning (not just projecting), where we have a strategy session to discuss moves you can make to actually lower that tax bill instead of just predicting it.  The financial benefits and peace of mind are well worth the small additional cost.  The earlier you start, the better!