It’s tax filing season again, and countless hardworking Americans eagerly anticipate their big refund checks. Unfortunately, many may not receive what they hope for this year. Dealing with taxes can be a complicated and stressful aspect of personal finance. Nobody wants to be surprised with an unexpected tax bill, but it can happen for various reasons. So, if you find yourself in this unpleasant situation, below are some tips to help you avoid an unexpected tax bill and some advice on what to do if you do receive one.
How to Avoid an Unexpected Tax Bill
1. Maintain a Record of Your Earnings and Expenses
To minimize the risk of receiving an unexpected tax bill, you must consistently keep track of your income and expenses throughout the year. Make sure to record all types of income, such as wages, self-employment earnings, and investment returns. Additionally, maintain a detailed record of receipts and other documents related to expenses that you can deduct from your taxable income. This practice will ensure you have all the necessary documentation in case of a surprise tax bill.
2. Modify Your Withholdings
Ensuring that your employer withholds the appropriate taxes from your paycheck is essential to avoid any tax surprises. You may need to adjust your withholdings accordingly if you experience a significant life event, such as marriage, childbirth, or a job change. To determine the correct withholding amount, consider using the IRS withholding calculator.
3. Utilize Deductions and Credits
To avoid unexpected tax bills, utilize available deductions and credits. Deductions reduce your taxable income, while credits directly reduce the amount of taxes you owe. Some standard deductions include charitable contributions, mortgage interest, and state and local taxes. On the other hand, credits like the earned income credit and child tax credit can help lower your tax liability.
4. Max Out Retirement Savings
Increasing your retirement savings can be a smart way to reduce your tax bill if you have money in the bank that you’d instead not give to the IRS. You can still open and contribute to an IRA account until your filing deadline. The deduction you receive can lower your tax liability. Even if you have already filed your tax return without maxing out your retirement accounts, you can still contribute and amend your return to reflect the deduction.
5. Make Estimated Tax Payments
If you are self-employed or receive income from sources not subject to tax withholding, you must make estimated tax payments periodically throughout the year. The IRS offers forms as well as guidelines for calculating and paying your estimated taxes.
Steps to Handle Surprise Tax Bills
1. Check Your Tax Bill
Reviewing your tax bill thoroughly for accuracy is essential to avoid potential issues with your tax bill. Take the time to identify why the bill was issued in the first place. It could be due to an error in your tax return, a change in your income, or updates to tax laws.
2. File Your Taxes on Time
Filing your taxes promptly and meeting the deadline is crucial. While you may be tempted to procrastinate and delay the process, it’s important to note that avoiding your responsibility to file on time won’t save you from future troubles. If you miss the deadline, you’ll start accumulating penalties and interest from that moment, increasing the financial burden. Therefore, it is wise to file your taxes as soon as possible. This ensures you meet the deadline to avoid any unnecessary penalties and interest charges.
3. Request a payment extension
If you’re facing severe financial difficulties, consider requesting a payment extension from the IRS. Although the agency may grant you a grace period of up to six months, you must provide evidence of a significant financial loss, such as selling your property at a lower price than its value, to justify why you cannot pay the total tax bill on the due date.
4. Explore Your Options
After ensuring the bill is accurate, you must consider your options for resolving the debt. If paying the bill in full is impossible, explore other options, such as setting up a payment plan or negotiating a settlement with the IRS. Ignoring your tax bill is not an option, as it may lead to severe consequences. Remember, the IRS can take aggressive action to collect what you owe. So, it is best to address the situation promptly.
5. Consult With a Professional
It’s advisable to avoid contacting the IRS directly without representation. They can be intimidating and may not have your best interests at heart. If you’re uncertain about how to proceed or require assistance negotiating with the IRS, consider seeking professional help from a CPA, an Enrolled Agent, or an attorney specialising in tax relief.
As a team of experienced professionals, we have helped numerous taxpayers to resolve their IRS and State tax issues by negotiating on their behalf. If you owe money to the IRS, we can provide a consultation to assess your situation. We can also inform you about the options to help you secure the best deal possible. Contact Peace of Mind Tax Help today for more information.
To minimize the financial impact of an unexpected tax bill and avoid future surprises, it’s essential to take preventive measures and know how to respond if you receive one. You can stay organized throughout the year, review your tax return regularly, and seek professional assistance when needed to achieve this goal. By doing so, you can reduce the likelihood of being caught off-guard by a surprise tax bill and minimize its impact on your finances.