Every tax season, many Americans anxiously anticipate receiving a tax refund. They make plans to take trips, complete those home renovation projects they’ve been putting off all year, pay off debts, and even build their emergency savings. But for others, OWING Uncle Sam is a harsh reality faced every April 15th.
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Before I was married a few years ago, I was one of those people who would begin making big plans for my tax refund. Every year, I made it a point to file my taxes as soon as I received my W-2, and usually had my refund direct deposited into my bank account within a few weeks of filing. Since my birthday happens to be on Tax Day, this was always something I looked forward to. However, once I tied the knot, the situation changed. Much to my surprise, instead of getting a refund back each year, we would now start owing.
If you are like us and you have found yourself owing taxes in the past, here are a few things you can do to ensure that your finances don’t take a hit next tax season:
- Get an estimate of how much you will owe. There are several online tools and resources that will help you estimate what you may owe in taxes next year. The IRS’ website has a withholding calculator that allows you to determine approximately how much you will be required to pay each year. For those of you that are self-employed, you will need to estimate your income as well as your tax payments. A good place to start is with your current tax return. Do you owe a large amount? If so, you are either underestimating your income or the amount of taxes you need to pay. Consult a tax expert or visit the IRS’ website to get help.
- Make necessary adjustments on your W-4. If you find yourself consistently owing taxes each year, chances are, you are not having enough money withheld from your paychecks. Consult with a tax advisor to find out what changes you need to make to have more money withheld each paycheck. It could be as simple as changing the number of exemptions to -0- or having a little extra money withheld on line 6 of your W-4. If you are unsure how to complete the form, contact your Human Resources department for assistance. Just remember that your HR department is not there to give you tax advice, they can only help you fill out the form.
- Plan ahead so you are not caught off guard. If you have a rough idea of how much you will owe, and know you will owe more money than has been deducted from your pay check, you can start putting aside small amounts throughout the year to avoid having to come up with a large lump sum at tax time. A great way to do so is to deposit the money into a personal savings account each pay period, weekly or monthly. You can even add to the fund whenever you have a little extra money; whether from working overtime, receiving a holiday bonus or cutting back on some of those unnecessary purchases. If you are someone who has difficulty sticking to your savings plan, have your employer take the money out before you even see it. Saving up for your tax payment will also help you avoid having to dip into your emergency savings fund or turning to credit cards to cover it.
In the past, my husband and I have chosen to break up our tax payment over 3 months and to pay it in full by April 15th. This year we got tired of not getting a refund back and decided to do something different. After consulting with a relative who has a background in finance, we both changed our exemptions to -0- and now have an additional $10 withheld per paycheck. Although we will be taking home less money every 2 weeks, we can be stress free next tax season knowing that we don’t owe a large chunk of money. Who knows? I might actually be able to take that dream vacation I’ve always wanted for my birthday next year!