Many people dread tax time. No one wants to give the government any more money than necessary. And no one wants to owe a big tax bill after their tax returns are filed. Owing money to the IRS causes stress for many. If your bill isn’t paid on time, you can end up owning even more money in penalties and interest. The following tips will help you avoid tax debt.
It is important to re-assess your situation each year to ensure you have enough tax money withheld from your paycheck. Ensuring that you get the right amount taken out each pay period will help you owe less out of pocket in April. You should re-evaluate your situation at least once a year, and also when you have a major life change occur, such as getting married or adding a child to your family.
Even if you owe money to the IRS, it’s always a good idea to file your tax return early. This will help you get past the stress and move on with a plan in place. You likely already know that you owe money for taxes, so delaying the inevitable helps no one. Bite the bullet and get a jump start on paying the money that you owe so you can move on with your life.
Pay It Off
If you find out that you owe the IRS money in April, do your best to pay it off. You should not decimate your emergency fund or your savings account to do this, but if you have the extra cash on hand, it’s always best to take care of the bill right away. If you don’t have cash, consider raising the money another way. You can sell off assets to raise the funds. You may also consider a loan from your bank or credit union, or a credit card that carries no interest. It is better to owe a bank or credit union money than the IRS, as the payments are cheaper and the interest rates are lower.
Set Up a Payment Plan
If you can’t raise the funds right away, contact the IRS to set up a payment plan. Do not delay in this area; the bill won’t go away if you ignore it. You will just end up owing more once fees and penalties are tacked on. Failure to pay your tax bill on time can also damage your credit. A negative entry on your credit report can take seven to ten years to go away. And don’t wait for the IRS to contact you; if you know that you owe money, call them and get set up on payments.
Those who work for themselves or work as independent contractors for others have special considerations. You should set aside the proper amount of your pay each time you get paid to avoid a big surprise in April. While each person’s situation is different, it’s usually safe to set aside 20% of your earnings each time you get paid. Then, if you owe less than that in April, your bill is covered and you have extra money to do something else with. Just remember to set the money aside in an interest-earning savings account to maximize your investment. And don’t withdraw the funds for any other reason, so you don’t come up short at tax time.