About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area that works with clients virtually across the country. Lamar's work with his clients starts with a focus on budgeting, insurance, optimizing employee benefits, investing, and retirement planning. Dream Financial Planning is a Fiduciary Financial Planning firm specifically designed to help individuals in their 30s and 40s take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the DREAM Financial Planning Process ™ to help our clients achieve their goals.
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. If I had an unexpected tax bill, the first thing I'd do is visit the IRS Withholding Calculator to determine how to adjust my holding and make sure it doesn't happen next year.
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, reduction in hours, or other life changes. If anything doesn't match up, take a closer look.
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. Don't forget that you can still open and contribute to an IRA account up until your filing deadline. 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 that some questions were 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.
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, as well as 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. Just 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 those incurred 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.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio, feel free to send me an e-mail.
In the June Newsletter, I provide a market update and a PDF guide with tips to help you handle inflation. I also shared a CNN article where I shared my thoughts on Crypto and NFTs, 5 savings mistakes people make when building their financial life. If you find any of this information helpful, feel free to sign up to receive future e-mail updates. If you find any of this information helpful, feel free to sign up to receive future newsletters via e-mail.
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