Yes, owing taxes SUCKS, especially when it is an absolute surprise. Some of us have owed taxes for several years. Owing the IRS is sometimes an unexpected bill that can’t fit in our already tight budget. Despite how we may “feel” about it, owing taxes is essentially another "Loan" that is owed. Here’s how it is like a “loan," how it can affect your Credit Score and 3 Tips of things to do to avoid having to pay back taxes next year.
TOO MUCH, TOO LITTLE, TOO LATE
When “not enough” taxes is OR “too much” taxes are being taken out during the course of the year, it means that the exemptions on your W-4 or your tax deductions may be incorrect. But, here is how taxes are like a "loan.”
If “too much” taxes are being taken out of your check throughout the year, the government is essentially “borrowing” that money from you. They pay the amount they “borrowed” in a lump sum called a “Tax Refund.”
Conversely, if “not enough” taxes are being taken out of your check throughout the year, you are essentially “borrowing” the money from the government. The amount you owe in taxes is the “borrowed” money you must pay back. The great thing is that if you are not able to pay it back in a lump sum, payment plans over a period of time are available to avoid additional fees and penalties.
HOW TAXES CAN AFFECT YOUR CREDIT SCORE
If the Taxes Owed is not paid within a timely manner, the IRS may report the delinquent taxes as a “Tax Lien” on your credit report under the Public Records section on your credit report. This will negatively affect the Payment History category of your credit score, which is 35% of the calculation. Also, the amount doesn’t matter. Whether you owe $500 or $5,000, the negative affect to the credit score will be the same.
If it is reporting on your credit report and you have paid the taxes due in full, make sure you get a copy of the Satisfied Tax Lien notice from the IRS. Also, dispute the information on your credit report, if necessary to have it updated as “Satisfied.”
As promised, here are 3 Tips of things to do to ensure that you don’t owe taxes next year.
TRUST BUT VERIFY
Some people love to DIY (Do It Yourself) everything, including their taxes. And there are great Tax softwares available to help you do your own taxes. You can even do your taxes online. If you choose to do your own taxes, just remember President Ronald Reagan’s quote, “Trust but Verify.” This is important, especially if you owed taxes for last year. Simply take your completed taxes to a tax accountant or tax professional so they can make sure that you didn’t leave out any new deductions or, better yet, you didn’t write off something that didn’t qualify.
KNOW YOU’RE PLACE
One of the reasons why people end up owing taxes is because they have the wrong number of exemptions on their W-4 forms. 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 for guidance.
GIVE YOURSELF CREDIT
Many people have turned their hobbies into a business. However, some of those people don’t give themselves credit by not taking 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 it’s selling your homemade secret recipe cakes or providing consultation, make sure you keep your receipts for all of your business related expense in one place, like an envelope for next year’s tax return. You never know, certain business meeting meals up to your cell phone bill used for your business may be business tax write offs. Consult with a tax accountant or tax professional to understand what business expenses are tax deductible.
The moral of the story is that winning the Tax Game is to GET NOTHING and OWE NOTHING! #IJS
Tarra Jackson ... Making Money Sexy