Owing Taxes SUCKS! 3 Ways to Reduce Taxes Owed

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Yes, owing taxes SUCKS, especially when it is an absolute surprise. Owing the IRS can be a financial burden on an already tight budget. Despite how we may “feel” about it, owing taxes is essentially another “Loan” owed and can potentially negatively affect credit scores.  Here’s how, as well as three things to do to avoid having to owe taxes next year.

Too much, too little, too late

When “not enough” OR “too much” taxes are being taken out during the year, it means that the exemptions on your W-4 or your tax deductions may be incorrect.

If “too much” taxes are being taken out of your check throughout the year, the government is “borrowing” that money from you. They pay the amount they “borrowed,” throughout the year, in a lump sum called a “Tax Refund.” Getting a refund may mean that you gave the government an interest-free loan.

Conversely, if “not enough” taxes are being taken out of your check throughout the year, you are “borrowing” the money from the government.  The amount, you owe in taxes, is money “borrowed” that you must pay back. The great thing is that if you are not able to pay it back in a lump sum, you can make payment arrangements with the IRS over time to avoid additional fees and penalties.

How taxes can affect credit scores

If the Taxes owed are not paid in a timely manner, the IRS may report the delinquent taxes as a “Tax Lien” on your credit report under the Public Records section of your credit report. This will negatively affect the Payment History category of your credit score, which is 35% of the calculation. The amount does not matter. Whether $500 or $5,000 is owed; the negative effect on the credit score will be the same.

If the tax lien is reported on your credit report as “unpaid” and you have paid the taxes due in full, get a copy of the Satisfied Tax Lien notice from the IRS and then dispute the information on your credit report to have it updated as “Satisfied.”

Here are three things to do to to not owe taxes next year.

Trust but verify

Some people love to DIY (Do It Yourself) everything, including their taxes. And there are great Tax software available to help you do your taxes. You can even do your taxes online for free. If you choose to do your taxes, just remember President Ronald Reagan’s quote, “Trust but Verify.”  

If you owed taxes last year, consult with a tax accountant or tax professional, like Dryden Tax and Accounting, Inc., to make sure you don’t leave out any new deductions. Also, consult with the tax professional to make sure you don’t write off something that doesn’t qualify.

Know your place

One of the reasons people end up owing taxes is because they have the wrong number of exemptions on their W-4 form. 

Make sure to review, and update if necessary, your W-4 form with your employer annually, preferably at the beginning of each year. Consult with a tax accountant or tax professional, like Dryden Tax and Accounting, Inc., for guidance.

Give yourself credit

Many people have turn their hobbies into a business. However, they don’t give themselves credit because they don’t take advantage of available business tax write offs.  Not taking advantage of every eligible business tax write off is like giving away extra money. So, whether you’re selling your secret homemade recipe cakes or providing consultation; make sure you keep your track of all business related expenses and receipts.  

Certain business meeting meals to cell phones used for your business, and more, may be eligible for business tax write offs. Again, consult with a tax accountant or tax professional, like Dryden Tax and Accounting, Inc., to help you understand what business expenses are eligible tax deductions. 

The best way to win the Tax Game is to GET NOTHING back and more importantly, OWE NOTHING!