- Most people who file a tax return wind up getting a refund.
- If you landed in the opposite boat this past April, it's time to make some strategic moves.
Here's what to do if your tax bill was higher than expected.
It's common for workers who are self-employed to owe money when they file their taxes. That's because self-employed workers don't have taxes withheld as they go. Rather, they're required to estimate their taxes and pay them quarterly, and it's surprisingly easy to get those estimates wrong.
But many salaried workers end up getting a refund when they file their taxes. If that didn't happen to you this past April -- and, worse yet, you owed the IRS a large sum of money -- it's imperative you make these three moves over the next few months.
1. Adjust your withholding
If you're a salaried employee, you can anticipate the same paycheck every few weeks (or however frequently you get paid). But you may want to shrink that paycheck if you owed the IRS a lot of money this past year.
You can ask your payroll department to give you a new withholding form, and if you claim fewer allowances, you'll have more taxes taken out of your earnings. Obviously, you may need to adjust your budget to account for smaller paychecks. But that way, you'll be less likely to run into a crunch come tax time next year.
2. Beef up your IRA contributions
Funding an IRA won't just make it so you have money to pay your retirement expenses. It could also lower your tax burden immediately.
If you contribute to a traditional IRA, the money you put in is money the IRS won't tax you on. So, let's say you earn $60,000 a year and decide to put $6,000 into your 2022 IRA (that's actually the maximum allowable contribution for workers under the age of 50). If you go that route, the IRS will only be able to tax you on $54,000 of your earnings.
3. Be careful with capital gains
If you have stocks in a traditional brokerage account that have gained value since you bought them, you may be tempted to sell them at a profit, take the cash, and run. But not so fast. Capital gains, which apply when you sell investments for more than what you paid for them, are taxable, and if you take a large amount of gains this year, it'll add to your tax burden.
If you're going to cash out stocks at a profit, try to do so after you've held them for at least a year and a day. That way, you'll be bumped into the long-term capital gains category, which is less burdensome from a tax standpoint than short-term gains.
What’s more, if you're going to take gains in your account, you may want to try to offset them with losses. If you have a stock whose value is down that you've been looking to dump, you can sell it at a loss and offset your gain, thereby minimizing or potentially eliminating your tax bill.
Owing taxes to the IRS isn't fun -- especially when it comes as a surprise. If you recently got hit with a big tax bill, consider making these moves to avoid a repeat scenario next April.
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