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6 Steps for Handling an Unexpected Tax Bill Thumbnail

6 Steps for Handling an Unexpected Tax Bill

Have you just completed your taxes and discovered that you owe way more than you expected? Don't panic. There may be some ways to bring that hefty tax bill down.

Step 1: Check for Errors

First, go through your return and make sure that you haven't made a mistake. If you used tax software, note that it checks the math based on what you entered, but it doesn't know if you entered the right numbers. Common errors include entering a wrong number, adding an extra zero, or entering the same income in two different places.

When looking for errors, the best place to start is a line-by-line check, comparing this year's return to last year's return. Of course, some numbers will be slightly different, but the differences should match your raise, reduction in hours, or other life changes. If anything doesn't match up, take a closer look.

Step 2: Review the Cost Basis of Investments Sold

If you sold securities (stocks, bonds, ETFs, mutual funds, etc) that were purchased prior to 2011, the brokerage firm may not have cost basis on record, as brokerage firms were not required to report cost basis prior to that time. This could be the case for investments you purchased, received as a gift, or as part of a minor custodial account (UTMA/UGMA).

If you had Restricted Stock Units (RSUs) that vested and you subsequently sold, the cost basis may not have been reported by the brokerage firm where your stock plan account is held. With RSUs in particular, this means you could be paying taxes twice!

Review box 1e on your 1099-B to make sure this isn't blank. Let your tax preparer know if it needs to be adjusted. If you're filing your taxes on your own, IRS Form 8949 is used to report adjusted cost basis.

Step 3: Max Out Your Retirement Accounts

If you have money in the bank and don't want to give it to the IRS, upping your retirement savings could be a solution. Don't forget that you can still open and contribute to an IRA account up until your filing deadline (keep in mind there are certain eligibility requirements). The deduction you receive will reduce what you owe. If you have already filed your tax return without maxing out your retirement accounts, don't worry; you can still amend your return if you make your contributions in time.

Step 4: Check for Other Deductions and Credits

Go back and look for any deductions and credits you might have missed. These could include business expenses, energy efficiency upgrades, child credits, and more.

If you used tax software, you might have found that some questions were confusing or buried, so you might have accidentally skipped over a credit. The best thing to do is to research whether there are credits for any large expenses you had throughout the year that might come with tax incentives.

Step 5: File Your Tax Return Anyway

Don't neglect to file your tax return because you can't pay. There are separate and larger penalties for failing to file a return. These include automatic monetary penalties for late filing, as well as the possibility that the IRS thinks that you are trying to evade your taxes because you can't pay what you owe.

Step 6: Request a Payment Plan

If you can't pay your tax bill in full, pay what you can. Late payment penalties are based on your outstanding balance, not your original tax bill. Just like paying off a loan, the more and earlier you pay, the less you pay in interest and penalties. 

If all else fails, you can request an installment agreement from the IRS. This is a payment plan whereby you make monthly payments and incur slightly lower penalties than those incurred if you don't pay. The other advantage is that if you make your payments on time, the IRS won't keep sending you threatening letters or file a tax lien.

Do you need help figuring out how to reduce your future taxes? Schedule a complimentary consultation to learn more about how tax planning is incorporated into our comprehensive wealth management and financial planning services.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.