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5 Steps for Handling an Unexpected Tax Bill Thumbnail

5 Steps for Handling an Unexpected Tax Bill

Did you just do your taxes and find out you owe way more than you expected? Don't panic. There are several steps you can take to potentially reduce that hefty tax bill.

Step 1: Check for Errors

First, go through your return and make sure you didn't make a mistake. If you used tax software, it checks the math based on what you entered but doesn't know if you entered the right numbers. Common errors include entering a number wrong, adding an extra zero, or entering the same number 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 return. 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 anything doesn't match up, take a closer look.

Step 2: Fund an IRA

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 way to lower what you owe today by deferring the taxes on that money until retirement. Don't forget that you can still open and contribute to an IRA up until your filing deadline. Remember that not every IRA contribution is deductible; there's a phase-out over certain income thresholds. However, if you are eligible for the deduction, an IRA contribution will lower your tax burden this year. If you already filed without contributing to your retirement accounts, don't worry. You can still amend your return as long as you make your contributions in time.

Step 3: Check for Other Deductions and Credits

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 or consult a tax professional to determine if there are credits for any large expenses you had throughout the year that you think might possibly come with tax incentives.

Step 4: File Your Tax Return Anyway

There are monetary penalties for filing your return late, so don't delay filing your tax return just because you can't pay. You may be able to file an extension to avoid a late penalty.

Step 5: 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. The sooner you can pay off the balance, the less interest you will accrue.

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.

Do you need help paying this year's taxes or want to consider utilizing tax-advantaged investment strategies? Please see the calendar link below to schedule a convenient time to discuss your situation.

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This content is developed from sources believed to be providing accurate information and provided by My NP Advisor. It may not be used to avoid any federal tax penalties. Scott Schloegel is not a tax professional. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.