Ways to Prepare If You Owe Income Taxes

Special Edition: Tax Time Tuesday

 

As W-2's and other tax documents start coming the the mail, it's that time to begin thinking about and completing your tax returns. I am not a tax professional, however I wanted to take some time to share some smart ways to use your tax refund this year or offer some advice on how to tackle a looming tax bill.

If you owe taxes for 2013: 

No one wants to have to write a check to Uncle Sam, however there are times where it is necessary. One of the most common reasons people owe taxes is because they have an increase in income and do not adjust their withholdings to accommodate for being in a new tax bracket. Another common reason is that the income received is not taxed at the time it is paid out, therefore leaving you with the taxes to pay when it comes time to file your taxes. 

As stressful as having to pay taxes is, you don't want this tax obligation to loom over your head and cause prolonged stress over an extended period of time. For 2012, We had a fairly large tax obligation, which we knew would be the case. As network marketers the income you make is not taxed when paid out to you. As an independent consultant it is your responsibility to pay the taxes. We knew this of course and started to put a portion (about 20%) of the checks into a savings account so that we would have the money to pay the IRS when tax time came. However, we were not diligent with our finances during a period of the year and had to dip into this savings to pay for other things. This left us with a smaller balance that we knew would not cover our entire tax bill.

When we figured out how much we owed, we paid as much as we could, but that still left us with a large amount outstanding. We applied through the IRS to make incremental payments over the course of 6 months. We buckled down and revised our budget to be able to pay off the large tax debt in about 4 months. We were happy when that was over and hope to never have to experience that again.

Ways to prepare for an overwhelming tax obligation:

Being proactive with your finances is a great way to keep your money in your control and not in the control of others. Here are a few ways that you can prepare yourself for an overwhelming tax obligation  in future years.

1. Pre-Pay the taxes quarterly through the IRS. We did this option the year prior and this helped reduce our tax obligation. If you anticipate that your income will be the same or higher in the next year and you know you will owe taxes, the IRS will estimate the taxes owed for the next year and break that up into 4 quarterly payments throughout the year.

2. Put money away through the year. When you receive an income where the taxes are not taken out automatically, it is smart to put a percentage of that check away to be able to pay your anticipated tax obligation. Depending on your tax bracket, you want to put away anywhere between 10-30% of your income away.Be smart and don't dip into this money. Even if you don't owe as much as you have saved throughout the year, think of that extra money as your tax return.

3. Adjust your withholdings. Again, I am not a tax professional, but if you sit down with one and show them your situation, they can suggest what to claim for your tax withholdings if you receive income that is taxed at time of payment.

Join me on the next Special Edition: Tax Time Tuesday blog where I will discuss smart ways to use your tax refund.

(Hint: I will not suggest taking a trip to Vegas or buying a brand new big screen TV!)