There are many things that you can do throughout the year to help ensure that you don’t owe Uncle Sam in April. Here are some helpful tips and advice to help reduce your end of year tax payment:
Owing Income Tax
Tracking your Tax Withholding
Keeping track of your withholding is one thing. Find out what your tax bracket is and the percentage that is associated with that bracket. Then of course you have to make sure that percentage is being withheld. Keep in mind this is a somewhat risky proposition if you don’t record all of your income from all of its sources. For example, you must include both yours and your spouse’s income together to get the right tax bracket if you are going to file jointly.
Be sure to include Self-Employment
The next thing is to make sure that you are including all of your self-employment taxes. A great deal of self employed people will never think about taxes until they show up on April fifteenth with a huge balance due or the rude awakening of being told that there really is no such thing as under the table income. Remember that all worldwide income is reportable for tax purposes, you may be able to rack up expenses against it, but it is still reportable. Don’t let anyone tell you otherwise.
Miscalculating your withholding or not paying estimated taxes on your self-employment income can leave you with a bigger problem at tax time than having a balance due on your taxes. Underpayment of taxes will pose a penalty if you owe more than one thousand dollars at the end of the year. This penalty and the balance due of taxes are both due on April fifteenth. Additional penalties and interest will be assessed if you do not pay what is owed by the April fifteenth deadline.
Another situation that can create an unexpected balance due is early withdrawal of savings. If you are under fifty-five years of age and make a withdrawal from a qualified retirement account (including 401Ks), you will have to pay taxes and penalties on that withdrawal. Some accounts, such as Roth IRA accounts, will not bear penalties or tax consequences because contributions are made to these accounts with after tax money. Any account that is made with pre-tax funds will be subject to taxes and penalties.
Did you have any stock sales or land investments that paid off this year? Capital gains are another overlooked item that taxpayers can be surprised with at tax time. Capital gains are also taxed differently than your other sources of income. If you have the option of having some of your gains withheld for tax purposes, you might want to consider doing it. Remember especially if you have a large gain in one year, that you will not want to be facing a penalty on top of a balance due, so make sure that you have sufficient withholding in order to cover any taxes assessed on your gains.
Now, on the lighter side, keep in mind that the income tax structure is what the IRS calls a pay-as-you-earn system. Hence, for you self employed people, you make estimated payments throughout the year, and you employed people have taxes taken out of your check every time you get paid. Having withholding taken out of any savings withdrawals or investment gains will also help at tax time. Remember that any balance due and penalties assessed will be due on or before April fifteenth.
When it is time to File
If you do come up surprised at filing time, don’t panic. If for some reason you do have a balance due that you can not handle all at once, call the IRS. Keeping in contact with them and communicating about your situation will help you resolve the situation in the best possible way. However, even if arrangements can be made in regards to what you owe, keep in mind that after April fifteenth, the IRS will begin assessing additional late penalties and interest on the balance of what you owe. These will continue to be assessed until the balance is paid off.
As always, if you have questions about the tax consequences of any particular event in your life, contact a qualified tax professional or the IRS to assist you.