It’s getting closer to the big tax day –April 17 — and hopefully you’ve submitted your taxes by now! Once this time of year hits, taxes seem to be all anyone can think about, and by now just about everyone is sick of it. They’re stressful, complicated, and sort of like a lottery. Will you owe, will you get money back, will you break even? If you are now finished with this dreaded task for this year and want to think about what’s next, then this post is for you.
There are many things to think about at the end of every tax season, although most people don’t seem to realize that. We often just submit our return and forget about this part of life until it hits us in the forehead (d’oh) again the next year.
However, wouldn’t it make more sense to learn from what did or didn’t happen? Taxes aren’t as beyond our control as we tend to think they are. You know how it is, people say you can be sure of two things in life: death and taxes. But there are ways to get the control back! You can’t really avoid paying taxes, but you can control, to some extent, how and when you do.
Need to Adjust Your Tax Withholdings?
So many people talk about what they’re going to do with their tax return. Maybe go on a vacation, buy something for their home, pay debt down, or put it into savings. But what about the unlucky ones that aren’t greeted each tax season with the promise of a nice check, but rather the need to send one. Yes – many people end up owing! This can be good or bad, depending on how you look at it. I received a surprise last year when I ended up owing quite a bit of money – let’s just say I wasn’t exactly thrilled! I spoke to my employer about it and realized that my withholdings were too high and by changing them I could ensure that this didn’t happen again.
On the other hand, what if you got a huge refund but actually would rather have the money during the year instead of at the end of the year? To make sure you get your money during the year, you can adjust your withholdings and make them higher. That way, you may not get much of a refund at the end of the year, but you will take a higher amount of money home with each paycheck. Please remember, before making any changes, you should speak with a professional. Any decisions you make need to make sense long term. The tax system can be quite complicated – there’s a reason we pay professionals to take care of this task for us – so make sure you know the consequences of your decisions before making them.
Have to Pay? What Now?
Let’s say you’ve gotten a big surprise and now owe the government more money than you can just write one check for. What will you do? You can’t make that money appear out of thin air! The best thing you can do is get in contact with the government and set up a payment plan, which will depend on who you owe – federal taxes, state taxes, municipal taxes, or all of the above. Make sure to contact the right agency. The phone hotline for questions to the IRS is 1-800-829-1040. For questions related to state and local taxes, you’ll need to contact the appropriate government office.
Your payment plan will depend on your individual situation so explain in full honesty where you stand and they will work with you. But you’ll need to adhere to this payment plan above all else! If you default then the government has the power to end the plan and send you to collections. This will have a very bad affect on your credit, so don’t let this happen!
What if the amount you owe is over $1,000? This could end up costing you even more money. The government expects anyone who knows that they may owe more than this to pay taxes quarterly – and if you don’t they will charge 8-9% interest on the payment you owe. If this happens to you then it’s time to talk to your tax preparer and either adjust your withholdings (done through your employer) or prepare to pay quarterly for the next year. This won’t do anything about what happened to you this year but will keep you from paying more penalties next year.
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Prepare for Next Year
Whatever happens this year – whether it was joyous or painful – could be very different the next year. So don’t just file that return and forget about it! If you did receive a refund and you are happy to receive this refund every year then you don’t need to change a thing. All you have to do is decide what to do with it! (For tips, see Ben’s article, What to Do With Your Tax Refund).
If you want to make changes – either because you owed way too much or would prefer to get a smaller refund and receive that money throughout the year on your paycheck – then see your tax preparer and make a plan for the next year. Again, you don’t want to make changes without speaking to a professional because the consequences aren’t always as simple as they seem – and the IRS is one agency you don’t want to mess with (just ask Al Capone)!
Let’s say you owed this year and, even after talking to a professional, you are going to have to owe next year as well. This is mostly true of contractors and people who are self-employed, but it can also be true of full-time salaried employees. One thing you can do is create a savings account that you contribute to every month – enough so that in the twelfth month (next year’s tax season) you can just write one check and be finished with it. That way the payment next year won’t feel as painful because you were prepared for it. But remember, this may not be good enough if you think you may owe more than $1,000. If that is going to happen, make sure to pay each quarter and avoid any additional penalties. You could also choose to pay quarterly instead of setting up the savings account to take the burn out of the end of year payment.
Contrary to popular belief, we do have some control over our taxes – or at least how we handle them! Why let yourself gamble each year, not knowing if you’ll get a nice big check or owe one, when there are things you can do now to prepare and predict what will happen. Painful as it can be (is there really anything worse than dealing with taxes?) take the bull by the horns and set yourself up for the best year possible!
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