Taxes: All you need to know for financial and debt success

Your tax results -

Your balance due or your tax refund

Once you have calculated your tax based on your taxable income, added in any other taxes due, and subtracted any credits allowed to you, you are left with your actual tax liability.

You also add up any tax paid by withholding from wages and pensions, estimated quarterly payments made, and any refund applied from a previous year to figure out how much tax you have already pain in for the tax year.

You compare your tax liability with the amount already paid to figure out if you still owe additional amounts or if you will get a refund from the IRS. Ideally, you either have a refund of a few hundred bucks or owe a balance due of a few hundred bucks. That is the ballpark you want to be ideally. Remember, too big of a refund means you gave the IRS an interest free loan –and the extra money paid during the year would have benefited you better in an interest bearing account of your choosing. SO, if you have a big refund coming your way, while the fat check will be nice to get in the mail, you should instead try to better estimate the amount due fro the following year and keep that extra money paid in your pocket through out the year.

Keep in mind: Meeting with your tax advisor in October or November is a great idea. This is especially a good idea if you expect your tax picture to change in any way. By the later part of fall, you have a pretty good idea of your income and deductions for the year. But, you still have around 6 months to prepare for the April 15^th deadline for you to prepare and implement a tax payment strategy.

Electronic filing

These days, many taxpayers pay fees to tax preparers to receive their tax refund in a big hurry. This might be called Rapid Refund or something similar to it. As a new debt free financially wiser person, do not get caught in this trap, which often amounts to a high interest loan. What you are doing when you get this sort of expedited return is you are paying a fee to get a loan from the tax preparer, who is quickly repaid by the IRS refund. These fees can be the equivalent of very high interest rates.

If you file your tax return electronically, you can expect your refund to be directly deposited to your bank account within 2 or 3 weeks. Any IRS office, many employers, and even some commercial operations will file your tax return electronically without added charges. This may be true even if you prepare the tax return yourself. You can also have the tax return professionally prepared and electronically file it fro free at the IRS website. But, if you are interested in this type of filing and you want o be able to do your taxes early in the new year, try visiting a franchised tax preparer site such as H&R Block, who provide software early in the tax season at little cost. It is also guaranteed to be accurate and free of IRS audits in some cases when you use the site’s software. Again, the IRS site is completely free, but it is not available as early in the season as some other sites will be. So check them out if you are interested. Honestly, only if your taxes are cut and dry – simple – should you rely on software on some website. Getting online help can be tedious and land based H&R Block locations will not help online customers from the same company even. Be aware.

If you pay a tax preparer a fee to receive your refund in a week (or even less in some cases), rather than the 3 week typical wait, the fee paid represents interest on the refund loan fro a two week period. If you get a $2,000 refund and pay $40 to get it in two weeks early, this is the equivalent of paying annual interest of $1,040, over a 50% interest rate! If a bank offered you a credit card or loan with a 50% interest rate you would run as far away from that bank as you possibly could right? So, do the same when it comes to your tax refund. Do not become one of the people out there that needs the money in a big hurry because they have bills to pay – you know the regular bill money was spend on some unnecessary shopping spree or an item because you were anticipating a refund as you always do. This is a tragic plan and a horrible idea, and it is a bad way to go when you are trying to live a debt free life.

Owing money to the IRS

You do not want to owe money to the IRS. While the interest rate is modest when you do owe, the penalties that are added for late payment increase the amounts due very fast. If you do file your tax return late, penalties are also added then too and they are not cheap ones at that.

If you owe any amount, it should be within the level you are able to pay. If you properly estimated your tax near the end of the year, you have already planned how you will pay the balance due. If the amount surprises you, then, you need to do better tax planning in the next year. But you will additionally need to figure out how you will pay this balance due on time.

If you will owe money to the IRS, send your tax return in on time with as much of the balance due as you can afford to pay. That will eliminate the late filing penalty on the entire amount due. It will also eliminate the late payment penalty ion the amount sent with the tax return.

If you will be able to pay the entire balance with a few months, send as much as you can as often as you can to the same address where you send your tax return. Include a statement with your full name, address, phone number, social security number, and the tax year for which the payment should apply.

If it will take you longer to pay (more than 6 months) the balance due, you can expect to be offered an Installment Agreement. You need to pay a fee to be approved for this program, but it will permit you to make payments without receiving additional threatening letters or collection notices from the IRS.

Keep in mind: If you owe the IRS, you need to drop all of your other loan and credit card payments to the minimum due and give any extra money from this to the IRS. It is even worth while to go on the starvation budget for a couple of months to take care of this unexpected debt.

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