Did you finish your tax returns and realize that you owe more than you anticipated? Don't fret. There are various methods to reduce a substantial tax liability.
Step 1: Check for Errors
To begin, carefully review your tax return to ensure that no errors were made. Although tax software calculates based on the input data, it cannot detect incorrect entries. Common mistakes include inputting an incorrect number, adding an extra digit, or recording the same income twice.
When searching for errors, it's recommended to conduct a line-by-line comparison of this year's return with last year's return. While there may be slight differences, they should correspond to your salary increase, reduction in work hours, or other life changes. If anything seems amiss, dig in further.
Step 2: Max Out Your Retirement Accounts
If you have money in the bank and don't really want to give it to the IRS, consider increasing your retirement savings. Keep in mind that you can establish and contribute to an IRA account up until the filing deadline. The deduction you receive will decrease the amount you owe. If you have already submitted your tax return without maxing out your retirement accounts, don't fret; you can still make your contributions prior to the deadline and then amend your return.
Step 3: Check for Other Deductions and Credits
Review your tax return to identify any overlooked deductions and credits, such as business expenses, energy-efficient upgrades, child tax credits, and other applicable credits.
If you utilized tax software, you might have encountered some challenging or buried questions, resulting in inadvertently missing a credit. Research potential credits for significant expenses incurred throughout the year that could offer tax incentives. This will help ensure you receive all eligible deductions and credits.
Step 4: File Your Tax Return Anyway
It's essential to file your tax return even if you're unable to pay your taxes. Neglecting to file your return can result in separate and more severe penalties, such as automatic monetary fines for late filing and the potential for the IRS to suspect you of tax evasion due to an inability to pay what you owe.
Step 5: Request a Payment Plan
If you're unable to pay your entire tax bill, pay as much as you can. Late payment penalties are based on your outstanding balance, not your initial tax bill. Similar to repaying a loan, the more and earlier you pay, the less you'll incur in interest and penalties.
If all else fails, request an installment agreement from the IRS. This payment plan allows you to make monthly payments with slightly lower penalties than those incurred for non-payment. Moreover, if you make payments promptly, the IRS won't send threatening letters or file a tax lien.
If you require assistance with understanding how to pay this year's taxes or minimizing your future tax liability, speak with your financial advisor today.