Do You Owe At Tax Time? Don't Panic! Take These Steps Instead

So, you found out that you owe more taxes when you prepared your return.  Now what?

The answer is that you should probably take two concrete steps to deal with the news.  First, you need to deal with the taxes due for last year.  Then, you'll want to address any changes you need to make to avoid this happening again.  

Payment Options

The IRS does give taxpayers some choices when it comes to paying what they owe.  You can, of course, pay by check or credit card by April 15.  The amount can also be withdrawn directly from your bank account by setting up this option at the IRS website.  

However, if payment in full is too much to handle at one time, you may also set up a payment plan using the same "Payments" section of the IRS site.  There is a fee for the setup which varies depending on whether you choose the auto-payment option or not.  

The final alternative - which should only be used as a last resort - is to let the IRS offset your future refunds to pay the debt.  This option will come with penalties for nonpayment and, like any debt, may involve being sent to collections or having money seized that you hadn't intended to be used.  Also, some employers require that employees in certain positions be in good standing with their taxes, so be sure to work out a payment plan so as not to jeopardize your job.

Protect the Future

Once you've made arrangements to deal with your past tax debt, turn your attention to preventing this from happening again.  There are several ways to ensure you don't have a tax bill at the end of the year.  

Increase your family's withholding.  Amounts withheld from all the paychecks of both you and your spouse are pooled together to meet your tax obligation.  So, if the withholding is insufficient from one source, simply increase it on another source of income.  It's generally best to focus your efforts on the one or two highest grossing jobs.  

Pay estimated taxes.  If you are self-employed or have other sources of income that aren't subject to withholding, you can pay an estimated amount of taxes throughout the year (generally four times a year).  You can work with Tri-Check Income Tax Service or another qualified accountant or tax preparer to estimate your quarterly tax burden.  

Ask for withholding on Social Security or retirement income.  Call up the provider for any pensions or retirement distributions and ask them to begin withholding tax on money sent to you each month.  The Social Security Administration can also withhold taxes upon your request.  

Set money aside.  If you're a sole proprietor and it's hard to estimate your tax needs in advance, you can choose to simply set aside a percentage of your earnings that you can use to pay your tax bill annually.  While it's best to work with your tax preparer to determine this amount, a good place to start is to set aside at least the amount necessary to cover your self-employment tax.  

While it's no fun to receive a bill from the government at tax time, it can happen when there are changes to your financial or family situation.  The key is to focus on getting rid of the debt already incurred and then to make positive changes so that your tax preparation appointment is not as painful next year.