Handling An Unexpected Tax Bill

Posted by: Joseph Kuo | April 8, 2022

Did you just do your taxes and find out you have an unexpected tax bill? Don't panic. There are several ways you can work to bring that hefty tax bill down.

Did you just do your taxes and find out you owe way more than you expected? Don’t panic. There are several ways you can work to deal with an unexpected tax bill.

Check for Errors

First, go through your return and make sure you didn’t make a mistake. If you used tax software, remember that the software only checks the math based on what you entered, but doesn’t check the validity of the numbers you enter. Common errors include transposing two digits, adding an extra zero, or entering the same income in two different places.

The best approach to minimize errors is to verify each number as you enter it. That way, you can trap errors as you make them, instead of having to go back and check line by line. If a number doesn’t make sense or if you are unsure of its validity, comparing it to last year’s return can give you guidance. Of course, some of the numbers will be slightly different, but the differences should match your raise, reduction in hours, or other life changes. If there’s a difference that doesn’t make sense, that’s usually a sign that the number needs a deeper dive.

Max Out Your Retirement Accounts

If you have money in the bank and just 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 up until your filing deadline. The deduction you receive will reduce what you owe.

If you already filed without maxing out your retirement accounts, don’t worry. You can still amend your return as long as you make your contributions in time.

Check for Other Deductions and Credits

If you are itemizing your deductions, go back and look for any other deductions and credits you might have missed. This could include things like business expenses, energy-efficiency upgrades, child credits, and more.

If you used tax software, the questions are sometimes confusing or buried, so you might have accidentally skipped over a credit. The best thing to do is research if there are credits for any large expenses you had throughout the year that you think might possibly come with tax incentives.

File Your Tax Return Anyway

If you have an unexpected tax bill, don’t delay filing your tax return because you can’t pay or because you are unsure of the amount owed. There are separate and substantial penalties for both failing to file a return and for not making at least a partial payment. This includes automatic monetary penalties for late filing as well as the possibility of the IRS thinking you were trying to evade taxes because you couldn’t pay what you owe.

If you need more time to recalculate the tax owed, at least file for an extension. If you file an extension though, you will still owe interest based on the normal filing deadline.

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 where you make monthly payments with slightly lower penalties than if you just didn’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.

Although nobody wants a larger than anticipated tax bill, there are some situations such as tax loss harvesting where paying more taxes can be strategically advantageous. Need help figuring out how best to reduce your future taxes, or prevent a future unexpected tax bill? Talk to an experienced financial advisor today.

If you need some last minute tax advice from an experienced financial advisor, contact me via email at joseph@abundancewp.com, or schedule a meeting by clicking the button below:

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