It’s never too early to get started on your income taxes and find ways to pay less tax on the money you earned last year. To make tax filing in April easier, don’t ignore your income taxes now (especially if you’re self-employed — use income tax software to make filing easier). Here’s how to get started on solving your tax problems early, from financial expert Ethan Ewing.
“When the tax year is half over, especially considering the financial changes many Americans have faced during this year’s economic recession, the time is right to review your tax situation and determine whether you need to take action,” says Ewing.
Need encouragement to Blossom into a new season of life? Sign up for my free weekly emails!
Using a personal finance software program makes doing and filing your income taxes much easier – click on the Turbo Tax Deluxe Federal Income Tax Software. And, read on for Ewing’s nine strategies for income taxes…
Solving Tax Problems Early – 9 Strategies for Income Taxes
1. If you had an extension, don’t forget to file your income tax! If you filed for an extension in April, remember to file the actual tax return now (or you’ll be facing even bigger tax problems). First-time home buyers who purchased a home in last year and filed an extension to receive the first-time home buyer tax credit, have to file the return to claim the refund.
2. Estimate how the economy will impact your taxes. Check on your financial investments to understand losses from any sales. Talk with a tax advisor to determine if you should change your strategies for paying less on income taxes.
3. Monitor estimated tax payments due. To get started on your taxes, self-employed people or passive income-earners should re-estimate annual earnings midway through the year to be certain they are on track. Those who have lost work, for instance, might owe less total tax than previously anticipated. The Internal Revenue Service (IRS) recommends that people who estimated their earnings too high or too low complete a new estimated tax worksheet to calculate their true estimated tax due.
4. Avoid penalties for not paying back taxes. The penalties for not paying income tax owed with a filed return are much less than the penalties for not filing a return at all. Even if paying the tax bill is a hardship, most people still would be better off filing the tax return to avoid substantial late-filing penalties. To solve tax problems early, do everything you can to avoid penalties.
5. Take bank loans, cash advances, or use equity to pay taxes. If it is at all possible to pay a tax bill, the IRS website suggests considering bank loans, cash advances on credit cards, raiding savings accounts, borrowing against retirement or life insurance, or using equity in assets (such as a home) to pay. “If you are in dire financial circumstances, exchanging one debt for another will not make things easier, and putting your home at risk is almost never a smart move,” says Ewing. “Consult a tax and/or financial adviser before making a decision.”
6. Know your tax-paying options. The IRS has several methods for taxpayers to pay, such as: an installment agreement (payment plan); a temporary delay in which the IRS waits to collect (but still charges penalties and interest, and may put a lien on assets); and an offer in compromise, where a taxpayer who is out of financial options makes a one-time settlement agreement with the IRS to pay a lesser amount. Taking advantage of the IRS’s options can be a smart strategy for income taxes.
7. Ask the IRS when you need help paying taxes. To get started on your taxes early, contact the IRS sooner rather than later. The agency’s policies have some leeway for taxpayers who contact the IRS or pay a late bill before the IRS finds them. For those who cannot pay because of a death in the family, serious illness, financial records lost in a natural disaster, or reason the IRS deems “reasonable cause,” the IRS might waive penalties.
8. Don’t count on bankruptcy protection. Historically, consumers in severe IRS debt could file for Chapter 7 bankruptcy protection in order to wipe out certain unsecured debts, thereby reducing their overall debt burdens. Now, with the bankruptcy “means test,” many consumers must file Chapter 13 bankruptcy, which establishes a repayment plan, rather than eliminating all debt.
9. Get help for your income taxes – even if you don’t have major tax problems. Tax specialists, often found at or through reputable debt settlement firms, can negotiate directly with the IRS on behalf of consumers who owe $10,000 or more. Tax relief specialists are usually attorneys, enrolled agents or certified public accountants with special training and experience. They can navigate the intricacies of IRS forms and calculations, help consumers understand IRS criteria, and then help them return to good standing with the IRS.
For more tax strategy tips from Ewing, read Tips for Filing Your Income Taxes.
If you have any questions or thoughts on getting started on your taxes, please comment below…
Bills.com offers free information about personal finance issues, including credit cards, debt consolidation, insurance, mortgages and other loans.