Effective tax planning is an important aspect of financial management that should be addressed year-round. Waiting until April to determine your tax liability is a risky strategy. To keep more money in your pocket, you must be aware of the circumstances that can hike up your taxes. In this article, we’ll dive into five significant factors that could potentially result in a higher tax bill. By being proactive and taking these factors into account, you can plan your finances better and avoid any unexpected tax increase.
Factors That May Cause an Unexpected Tax Increase
Factor #1: Taking Money Out of Your Retirement Plan
Withdrawing funds prematurely from your retirement plan, such as a 401(k), can result in considerable tax penalties. If you choose to receive the funds as cash rather than transferring them to an Individual Retirement Account (IRA), you will need to pay taxes on the amount withdrawn. Moreover, you may be subjected to a 10 percent penalty. By avoiding these mistakes, you can protect a major percentage of your hard-earned retirement assets.
Factor #2: Engaging in Freelance Work
Although freelancing allows for more flexibility and independence, it also comes with complex tax implications. Freelancers, gig-workers, and self-employed individuals are responsible for the self-employment tax, which includes both the employer and employee components of Medicare and Social Security taxes. Failure to consider this tax burden and allocate funds appropriately can result in unwelcome surprises when tax season arrives.
Factor #3: Neglecting to Withdraw Your Required Minimum Distribution (RMD)
Upon reaching the age of 70, retirement accounts like IRAs and workplace plans mandate individuals to initiate minimum distributions. Failure to fulfill this requirement may result in severe tax fines. To prevent needless financial setbacks, it is critical to be educated about RMD legislation and ensure compliance.
Factor #4: Failure to Make Contributions to Your IRA
Skipping your yearly IRA contribution can have unanticipated consequences for your tax responsibilities. Before you decide not to contribute to your IRA, you should carefully consider the implications for your overall tax liability. Performing careful calculations and consulting with a tax professional can assist you in making an informed decision.
Factor #5: Clearing Your Mortgage Balance
Although paying off your mortgage can provide you with a sense of financial freedom, it can also have an impact on your tax situation. Mortgage interest is usually tax-deductible if you itemize your deductions. Losing this deduction has the potential to increase your tax bills. While it should not be the main reason for keeping a mortgage, it is an important factor to consider.
Get Professional Assistance for Tax Debt Cases
Maintaining year-round tax planning is critical for preventing unforeseen surprises and enhancing your financial well-being. By staying informed about potential factors that can unexpectedly increase your tax liability, such as early withdrawals from retirement plans, self-employment tax responsibilities, missed required minimum distributions, skipped IRA contributions, and the impact of paying off your mortgage, you can take proactive measures to effectively manage your tax obligations.
If you ever find yourself owing back taxes, it is important to enlist the guidance of professionals who can navigate the intricacies of tax debt resolution. Our firm specializes in assisting individuals in negotiating with the IRS, potentially settling their tax debts for a fraction of the amount they owe. Our experienced tax resolution specialists can offer guidance through the IRS maze procedures, granting you peace of mind.
Keep in mind that enlisting the assistance of a tax resolution expert for IRS-related issues is vital for safeguarding your hard-earned income and assets. Contact us today to schedule a confidential consultation to learn how we can help you take back control of your financial life.