5 Steps for Handling an Unexpected Tax Bill 2024

About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C., area who works with clients virtually across the country. 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 Free 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 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. This is something we do for every client who has been faced with a surprise tax bill. 

As a reminder tax prep is now included as part of our ongoing financial planning service and with a one-time financial plan. This will be in addition to the Tax Report we already generate for clients.

If you missed last week's update and you're looking for tips to help you prepare to file your taxes check out our Your 2024 Tax Filing Season To-Do List.

If you'd like help setting yourself up for financial success feel free to schedule a free consultation.

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.

Different Ways You Can Work With Us

Wealth Management - Combines ongoing financial planning and investment management. The financial planning fee is waived if we manage at least $500,000 in investments for you. Tax Preparation will be included.

Ongoing Financial Planning - Our most popular program now includes tax prep. This is a good fit if you have several goals and want the option to manage your investments. We'll cover everything from spending, insurance, taxes, investments, retirement planning, and estate planning, just to name a few. Our goal is to give you and your family an easy-to-understand comprehensive plan to provide you with confidence you're making the right financial decisions.

One-Time Financial Plan With Ongoing Support - An accelerated version of the service above with additional support for one year after your start date. This service requires prepayment for the year and is offered at a significant discount from the annual pricing for ongoing planning.

Estate Planning - If you're looking for a cost-effective solution to get your estate planning documents in place, we can help. We have partnered with a leading Estate Planning platform to deliver high-quality Estate Planning documents for a fraction of the cost of working with an attorney.

Revocable Living Trust-Based Estate Plan

• Individual - $1,600
• Couple - $2,100

Will-Based Estate Plan

• Individual - $900
• Couple - $1,400

Tax preparation is now part of the ongoing financial planning program. This will be in addition to the Tax Report we already generate for clients and our work with the IRS Withholding Calculator to help prevent our clients from getting a surprise tax bill.

Three-Hour Ask Me Anything - This is a good fit if you have 2-3 goals you want help with. These three one-hour meetings need to be completed within three months. The fee for this service is $2,000.    

Financial Coaching - Our financial coaching program starts at $99/month. This is ideal for someone who is looking to simplify and automate their finances. We'll also serve as an accountability partner and help you overcome obstacles that may be stopping you from accomplishing your goals. You can learn more about our coaching program here. If you think this program might be a good fit for you, schedule a 15-Minute Demo.

Paying for College

This service is an ideal fit for parents of high school juniors and seniors with a standardized test score (ACT/SAT) and a list of colleges they're considering. This is included as part of ongoing financial planning or as a stand-alone package. This service includes:

• A college affordability assessment
• How Much Colleges Think You Can Afford (EFC) 
• If You Qualify for Need-based Grants
• If You Qualify for Merit-based Scholarships
• Help you search for scholarships
• 1 Year Out of Pocket Cost (For Each College)
• 4 Year Out of Pocket Cost (For Each College)    

I hope we get the opportunity to work together. If you'd like to see if any of these services are a good fit for you, feel free to schedule a free consultation or send me an e-mail.

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