How to Avoid a Surprise Tax Bill
— and What to Do If You Get One
Tax filing season is here again, and millions of hardworking Americans are already dreaming of those fat refund checks. Unfortunately, many of them may be disappointed this year.
The combination of recent changes to the tax law and updates to employer withholding tables have shrunk the size of tax refunds — and left some unlucky taxpayers with a bill instead of a check. Instead of making plans to spend their windfall, these taxpayers are struggling to pay the unexpected tax bill.
So, what can you do if you find yourself in this uncomfortable situation? How can you avoid ending up with a big tax bill this year? Here are some tips to help you avoid a tax bill and some advice on what to do if you get one.
Pay Attention to Your Paychecks
Thanks to recent changes in the tax law, you may have seen a boost in the size of your paycheck. And while that is ultimately a good thing, the reduced withholding could mean a smaller refund, or even a tax bill, when you file.
If you want to avoid a tax day surprise, pay close attention to your paychecks, especially the amount withheld for federal taxes. If you see the withholding has gone down, you can ask your employer to adjust it to make sure you’re withholding the right amount. That will mean a smaller paycheck now, but it could save you future tax debt and penalties.
Run the Numbers ahead of Time
You do not have to wait for tax filing season to estimate how much you might get back or how much you might owe. As long as you have your final paycheck from last year and some basic information, you can run the numbers and get a good idea of where you stand.
You will need as much information as you can get on your income and deductions, so gather as much documentation as you can. Armed with those numbers, you can estimate your future taxes using your favorite tax prep software or your calculator.
File as Early as You Can
If you do owe money to the IRS, it pays to know about it as soon as possible. Filing as soon as you can means you will have more time to make a plan and find the money to pay the taxes due.
Keep in mind that paying late could mean additional penalties and interest, so it makes sense to settle up as quickly as you can. By filing early, or at least running the numbers, you will know where you stand.
Good News: The IRS has several debt settlement options including their Fresh Start Initiative and is generally willing to settle with taxpayers who have been blindsided by a surprise tax bill and get pay it off in full. Hopefully, tax filing season will bring the big fat refund you are expecting, but it is important to be prepared for the unexpected. The new tax bill has unleashed a host of unintended consequences, including smaller refunds and surprise tax bills. By being prepared, you can reduce the pain of a surprise tax bill.
Contact us for more information or assistance with your tax returns.
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