January brings a new year, and 12 months to prepare for, minimize, and avoid current tax issues. If you owe a tax debt; a preliminary issue in resolving your tax debt is to determine why you owed the debt, and prove that you will not owe another tax debt again in the future. Or, if you anticipate owing a tax debt for the current tax year, you may minimize your debt given enough planning and time. Depending on your situation, taking steps early in the year to resolve a past or pending tax matter will make your options more affordable.
For many people who have a tax debt, their tax problem is a product of underwithholding. This term generally means that you didn’t pay enough taxes on earned income throughout the year, even if you don’t have wages to withhold taxes from. Correcting this type of a tax debt issue is usually simple in theory but difficult in application. The real problem is that many people, who end up facing this type of tax issue, don’t know about their tax problem until it is too late to correct or minimize the issue. This starts the spiral of owing taxes year-after-year.
For wage earners, by increasing your withholdings in January or February, you’re taking advantage of paying your taxes in the first quarter of the year and can pay less money on a monthly basis throughout the entire year. Many times, a tax issue isn’t discovered until April, when the tax returns are filed. By waiting until April to catch up with the change to your tax withholdings, to ensure you don’t have a tax debt the following year, you’ve already missed a quarter of the year. Therefore, to catch-up on your taxes, you have to increase your tax withholdings to fit four quarters of payments in to three quarters, or less. Therefore, you need to withhold even more money from your paycheck than often estimated, to compensate for the tardy correction.
The same goes for people who need to make estimated tax payments. Estimated tax payment are required if you are self-employed. Because your taxes are not automatically withheld from a paycheck, estimated tax payments require discipline to pay. By beginning a routine in January and February of regularly making estimated tax payments, you ease the burden throughout the remainder of the year.
Careful planning is needed to ensure you don’t give Uncle Sam an interest free loan by overpaying on your taxes throughout the year. However, sometimes sacrificing (a small) interest free loan to the government is worth the risk when weighed against a spiral of owing a tax debt, year-after-year.
This article is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.