Did you recently finish your taxes and find out you owe more than you expected? Don’t panic. There are several ways you might be able to reduce that hefty tax bill.
Step 1: Check for Errors
First, review your return and make sure you didn't make a mistake. If you used tax software, you can usually trust the math, but you should double-check that you entered the correct numbers in the right places and that you understand the wording of the questions. Common errors include entering a number wrong, adding an extra zero, or entering the same income in two different places.
The best place to start when looking for errors is to go line by line, comparing this year's return to last year's. While some of the numbers will be different, the differences should match your raise, reduction in hours, or other life changes. If something doesn't match up, take a closer look.
Whether or not you feel there may be an error, you should always read your return so you understand where the numbers go. Not only will this help you catch potential errors, but a better understanding of your tax return may also help you save money in future years. We’re happy to review our clients’ returns with them in as much detail as they like.
Step 2: Max Out Your Retirement Accounts
If you have money in the bank and want to reduce how much you owe the IRS, increasing your retirement savings could be a solution. You can still open and contribute to an IRA up until your filing deadline, and 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 if you make your contributions in time.
If you qualify for a Health Savings Account (HSA), check to see if you and your employer contributed the maximum last year. Since these can come in the form of your own direct contributions, payroll deductions, and employer contributions, it can be hard to track the yearly total. If you are in doubt of your contributions, call your HSA provider.
Step 3: Check for Other Deductions and Credits
Go back and look for any other deductions and credits you might have missed. Things like business expenses, energy-efficiency upgrades, child credits, etc. can all help reduce what you owe.
If you used tax software, the questions might be confusing or buried, so you might have accidentally skipped something, resulting in an overlooked credit. Do your research and see if there are credits for any significant expenses you had throughout the year that might come with tax benefits.
Step 4: File Your Tax Return Anyway
Rather than wait until you can pay to file, it is better by far to file your return even if you can’t pay what you owe just yet. Late filing can result in automatic monetary penalties. In addition, failing to file may lead to closer scrutiny by tax authorities, who might think you’re trying to commit tax evasion.
Step 5: Request a Payment Plan
If you can't pay your tax bill in full, pay what you can. Your outstanding balance influences your late payment penalties, 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 payment plan offers slightly lower penalties than if you didn’t pay at all. 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.
Need help figuring out how to pay this year's taxes or how to reduce your future taxes? Talk to your financial advisor today. Many financial advisors work with you throughout the year to help you lawfully lower your tax and prevent nasty surprises.