Earning income is a great thing, but the more you earn under our tax regulations, the more you owe.
Often, life events can throw us into a new tax situation without us really realizing it. Things like marriage, divorce, children becoming young adults, retirement, pay increases and more can impact our tax circumstances and we may find ourselves unprepared for the tax bill we get.
If you find yourself owing the IRS, here are some ideas to help you overcome this year's tax liability and prepare for next year so that you don't have to repeat the process. Most of the actions that need to be taken are things you can do right now.
1. Paying your tax bill. If at all possible, you should pay what you owe in full and on time. It may be a big hit, but it is better to adjust your spending over the next couple of months and pay the IRS than to incur penalties and fees associated with non payment or late payment (up to 5% per month).
If you are unable to come up with the funds to pay your taxes out of your monthly budget, consider borrowing from other sources before doing a payment plan with the IRS. IRS monthly interest can be higher than traditional sources.
If you have no other option for payment, the IRS offers payment plans. IRS has both short term payment plans (less than 120 days) and long term payment plans. These plans allow you to repay your tax debt over time and avoid incurring additional penalties for non filing or non payment. There is an interest charge for these repayment plans, but it is much easier than the non payment penalties.
2. Adjusting Withholdings: If you owed an amount that was hard to bear, you may want to consider adjusting your withholding on your W-4. This is the form that tells your employer how many deductions you anticipate for your taxes. If you reduce the number of deductions, your tax payment will go up each payday and your paycheck will go down. But paying each payday is easier than having a big hit at the end of the year.
The IRS encourages employees to use the Withholding Calculator to perform a quick “paycheck checkup.” An employee checking their withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time in 2019. It can also prevent employees from having too much tax withheld; with the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks. If changes to withholding should be made, the Withholding Calculator gives employees the information they need to fill out a new Form W-4, Employee’s Withholding Allowance Certificate. Employees will submit the completed W-4 to their employer.
3. Increase Retirement Participation: One of the easiest ways you can reduce your tax bill and prepare for your future at the same time is to increase the amount you contribute to your employer retirement plan. This money is not included in taxable income on your W-2 at the end of the year so it can save you some money on next year's taxes.