The world of taxes is one big minefield to navigate. Unless you spend most of your waking hours studying it as Enrolled Agents do, you probably won’t know all the tips and tricks to lower your tax bill – legally.
There are also tax savings to be had if you are “in the know.”
Don’t get tripped up… find out about these four tax mistakes that can impact your wallet.
#1 – Not Using Your Tax-Favored Accounts to the Max
These days there are tax-favored or tax-deferred accounts for the biggest expenses of your life – retirement, health care, and college.
Ignoring them means you’ll pay more tax than you need to.
In the case of retirement accounts such as IRAs and 401Ks, when it comes time to use the money, you will likely be in a lower tax bracket. Meanwhile, the value of the account has grown based on the value of those non-taxed contributions you’ve made over the years.
HSAs (Health Savings Accounts) work the same way, except you can use them for medical expenses right away. This instantly ups your buying power in the medical world. Consider this example:
Let’s say you contribute $100 every time you get paid. It doesn’t reduce your paycheck by $100, because your taxes will be figured on the amount you are paid minus that $100 (and any other pre-tax deductions). Depending on your tax bracket, your net paycheck may only be $80 lower (or even less).
So, go ahead and get the full value of that $100 and let the interest compound.
Otherwise, you are handing over that $20 to the federal government, rather than letting it grow steadily in your account until you have to draw on it.
#2 – Not withholding enough tax (or not paying estimated taxes on time)
If you want to avoid interest and penalties, Uncle Sam offers only one option: pay-as-you-go.
If you don’t pay 90% of what you will owe in taxes (or 100% of last year’s tax bill) and you owed at least $1,000 before the tax deadline, you will get penalized. Assuming you are able to pay your taxes as you go, you are racking up unnecessary penalties.
If you are having trouble with estimating and paying taxes on time, it is wise to call in an expert.
An Enrolled Agent can help ensure you pay the minimum amount of tax before the deadline so that you avoid penalties and unwanted attention from the IRS.
#2 – Not Filing Your Tax Returns on Time
Most people don’t have a fear of filing their taxes… they have a fear of paying taxes.
The problem is, if you don’t file at all, you’ll be penalized more than if you file but can’t pay all you owe immediately.
The IRS can work with you if you can’t pay. If you don’t file though, watch out!
You’ll incur a penalty either way. However, failure to file is 5% per month while failure to pay is .5%. Big difference!
The best advice? File, even if you can’t pay.
# 4 – Not Knowing When to Hold ‘Em and When to Fold ‘Em
Day traders beware… selling stock you’ve held short term will result in paying higher taxes on your gain.
If you hold stocks one year or less, you’ll pay the going income tax rate – up to 37% on your overall net short term gains. If you can hold on for one year, you’ll only pay the capital gains rate – a much more modest 20% at maximum.
It Pays to Bring in an Expert
These are just a handful of the many mistakes that can be made that cost you unnecessary penalties and tax. Again, an Enrolled Agent is familiar with all of the nuances of our enormous tax code (and it’s everchanging elements).
If you’ve made a mistake, it’s not the end of the world. Get the help you need to get your peace of mind back.
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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax Problem Solutions as well as an Enrolled Agent and a Certified Tax Resolution Specialist.
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Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.
The book is available in paperback and ebook on https://Amazon.com
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For more on SFS Tax Problem Solutions, visit: http://sfstaxproblemsolutions.com/
For more on SFS Tax & Accounting Services, visit https://sfstaxacct.com/
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738 Colorado Avenue Stuart, FL 34994
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Phone: 772-337-1040
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https://twitter.com/SFSTax/
https://linkedin.com/company/sfs-tax-problem-solutions
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