Have you just completed your taxes and discovered that you owe way more than you expected? Don't panic. There are several ways to bring that hefty tax bill down.
Step 1: Check for Errors
First, go through your return and make sure that you haven't made a mistake. If you used tax software, note that it checks the math based on what you entered, but it doesn't know if you entered the right numbers. Common errors include entering a wrong number, adding an extra zero, or entering the same income in two different places.
When looking for errors, the best place to start is a line-by-line check, comparing this year's return to last year's return. Of course, some numbers will be slightly different, but the differences should match your raise, reduced hours, or other life changes. If anything doesn't match up, take a closer look. Many financial planners offer tax planning and reviews as a part of their service to clients. Check with your financial professional to see if they have tools to review and compare your recent tax returns with this year's.
Step 2: Max Out Your Retirement Accounts
If you have money in the bank and don't want to give it to the IRS, upping your retirement savings could be a solution depending on your tax bracket. The IRS allows you to open and contribute to an IRA account up until your filing deadline. Some self-employed retirement plans (i.e. SEP IRAs) allow this to be done up until the filing extension date in October. The deduction you receive will reduce what you owe. If you have already filed your tax return without maxing out your retirement accounts, don't worry; you can still amend your return if you make your contributions in time.
Step 3: Check for Other Deductions and Credits
Go back and look for any deductions and credits you might have missed. These could include business expenses, energy efficiency upgrades, child credits, and more.
If you used tax software, you might have found some questions confusing or buried, so you might have accidentally skipped over a credit. The best thing to do is to research whether there are credits for any large expenses you had throughout the year that might come with tax incentives. TurboTax offers a list of the 10 most overlooked tax deductions1 when filing personal returns. The list includes: moving expenses, child and dependent care tax credit, earned income tax credit and state taxes paid when filing last year's taxes.
Step 4: File Your Tax Return Anyway
Don't neglect to file your tax return because you can't pay. There are separate and larger penalties for failing to file a return. These include automatic monetary penalties for late filing and the possibility that the IRS thinks that you are trying to evade your taxes because you can't pay what you owe.
Step 5: Request a Payment Plan
If you can't pay your tax bill in full, pay what you can. Late payment penalties are based on your outstanding balance, not your original tax bill. Like paying off a loan, the more and earlier you pay, the less you pay in interest and penalties. If all else fails, you can request an installment agreement from the IRS. This is a payment plan whereby you make monthly payments and incur slightly lower penalties than if you don't pay. The other advantage is that if you make your payments on time, the IRS won't keep sending you threatening letters or file a tax lien.
Do you need help figuring out how to pay this year's taxes or how to reduce your future taxes? Talk to your financial advisor today.
This content is developed from sources believed to be providing accurate information, and provided by Verity Wealth Partners and Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.