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Do you find that you seem to always owe the IRS? Tax debt is a reality for millions of Americans. The amount owed to the IRS is estimated to be about $527 billion.
The reason why people have tax debt is that they owe more than they expected. Owing taxes can place a lot of pressure on you, especially if you’re just getting by each month.
Find out how you can avoid owing the IRS and what you can do if you have a tax bill that you can’t pay.
1. Understand Your Income Tax Bracket
The tax code is complicated, there’s no doubt about that. Only 10% of Americans know how many income tax brackets there are.
The income tax brackets get more complex with your filing status. For example, a single person who earns $45,000 a year will pay 22% in income taxes.
A person who earns the same amount but files jointly could only pay 12%, depending on how much their spouse earns.
You want to make sure that you understand the tax brackets and know which one you’re likely to fall under.
2. Check Your Federal Withholdings
Once you know your tax bracket, you can then check with your employer to make sure money is withheld from your paycheck.
If too little is withheld, you wind up owing the IRS. If too much is withheld, you get a refund. Before you get excited about the windfall a refund can bring, keep in mind that you probably could have kept more money in your paycheck throughout the year.
3. Expect Self-Employment Taxes
Are you among the millions of workers who have side-gigs or are completely self-employed? If you’re new to this arena, be ready for a painful surprise.
Anything you earn over $600 will be taxed at the self-employment tax rate. This can add up to a big tax bill quickly.
Self-employed people pay a percentage of income taxes on their net income. They also pay 15.3% for Medicare and Social Security taxes. Why so much? It’s because self-employed people are covering both the individual and employer’s portion of the taxes.
4. Pay Estimated Taxes
Employees pay their taxes throughout the year through tax withholdings each pay period. Self-employed people don’t have that mechanism in place (unless the business structure is a separate tax entity), so they’re fully responsible for their taxes.
If you expect to owe more than $1000 in federal taxes, you need to pay quarterly estimated taxes.
5. Adjust Your Taxes for Life Changes
One reason why so many people owe the IRS is because they put their tax planning on autopilot. In other words, they set their withholding allowances with their employer and forget about them.
There may be life changes that you need to adjust for. A divorce will put you in a new tax filing status, and your income tax bracket will change.
Getting married, having children, buying a home, or having a child attend college will have an impact on your taxes.
Steps to Take When You Do Owe the IRS
You may have just finished your taxes and find that you still owe the IRS and the tax bill is more than you expected. There are certain steps that you can take if you find that you can’t pay the tax bill in full.
Don’t Ignore It!
Owing taxes to the IRS isn’t ideal. If you don’t have the means to pay, you may be tempted to do nothing because you have nothing left to lose.
Your best bet is to handle it by seeing a tax professional or contacting the IRS to let them know what your situation is and how you should handle it. You do have options available, no matter how bad your situation may seem.
Pay as Much as Possible
If you don’t have all of the money owed for taxes, you should at least pay something. Instead, pay what you have available. You can contact the IRS and see if you can go on an installment plan for the remaining balance.
Go on an Installment Plan
If you have a small amount of money, you can see if you can go on an installment plan to pay your tax bill. This is an agreement that you make with the IRS.
It states that you will pay a certain amount of money over each month over a certain amount of time, up to 72 months.
If you default on the installment plan, the IRS will attempt to collect the full amount owed. You don’t want to be in that situation, so make sure that you pay your bills on time.
Offer in Compromise
If you owe back taxes and don’t have the money to pay at all, an offer in compromise may help you pay less than the total amount owed on your tax debt. This is a way to reduce IRS tax debt and get a fresh start.
You definitely want to seek a tax professional to learn more about the program and find out if you qualify or not.
You Can Avoid Owing Taxes
Taxes are a necessary part of life, whether you like it or not. You may get hit with a sudden life change or didn’t know enough about taxes to find that you have a large tax bill that you can’t pay.
You can avoid that possibility by treating tax time like a year-round activity. You should always think about your income, deductions, and life changes and how they impact your taxes. If you’re not sure, seek help from a tax professional.
If you do wind up with a hefty tax bill, there are ways to reduce your payments or your entire tax debt. You don’t want to ignore the fact you’re owing taxes. You have to take care of it, no matter how intimidating it may seem.
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