How people end up in huge tax debt and how to avoid it
By now you have probably heard of at least one or two famous celebrities in the news with millions of dollars in tax debt. While these are extreme cases involving people who have large amounts of income and do not pay taxes over time, the same can happen to anyone regardless of their income bracket. To better show exactly how people end up in huge tax debt, and how to subsequently avoid such a fate, here are a few reasons.
Whether you own a business or just operate as an independent contractor, being self-employed can make it exceedingly easy to end up in huge tax debt. For instance, as someone self-employed, if you earned $70,000, you owe a certain portion of that amount to the government. People new to self-employment can overlook this concept, and forget that come tax time they owe money opposed to getting a refund, as some other people do. This can eventually lead to a large tax debt if you are still paying it off when the next year rolls around. Before you know it, you can find yourself under water on your tax debt. The best way to avoid this type of debt is by being prepared; anticipate having to pay taxes on your self-employed income, and put some money away each month as if your employer is taking out taxes from your paycheck. Then, when it comes time to pay in full, you will have all the money you owe.
This method of finding tax debt may be fairly obvious, but failing to file a tax return when you are legally required to do so is one of the most common ways to end up in huge tax debt. Often this is how those celebrities that owe millions of dollars end up in such a position — they choose not to file a return several years in a row, and the next thing they know, the IRS is tracking them down asking for more than they make in a year. Obviously, the best way to avoid this type of debt is to file a tax return and subsequently pay taxes. If you feel like doing so is too overwhelming, there are many resources and qualified tax professionals available to you come tax time, some may even be provided free depending on your circumstances.
Failing to Report Investment Income
Whether you own an income property, or have quite the stock portfolio, these are all investments that are subject to the capital gains tax, which means you are required to report them on your tax return. If you do not, you may find that you owe the government a huge amount of money, especially if you fail to do so in consecutive years. To avoid ending up in a large amount of tax debt from capital gains, the best method is to make sure your investment broker accurately reports on their end, and provides you with the necessary paperwork so you can accurately report your investment gains and/or losses. Also, when you find that you have income coming in from such investments, you should put a portion of it congruent with the amount you will owe, away in savings so you can pay it later.