It’s that time of the year where you’ve finally gotten around to preparing your tax return. You’ve crossed your i’s and dotted your t’s–taking every credit and deduction (legally) available to you and reported every required revenue source (taxable and nontaxable). You get to the end and you’ve accurately calculated total tax due, but there’s just one teeny (actually probably really big) problem…you can’t afford your to pay your taxes! (Uh oh). While this might be a confusingly cringe worthy moment, it is surprisingly not an uncommon one.
Many taxpayers end up filing their tax returns, unable to afford the full amount of tax due. While the federal government and many state governments have safety nets in place to assist taxpayers in finding remedies to the whole tax payment problem (e.g., installment agreement, offer in compromise, etc.), wouldn’t it be easier and hassle-free if we could stay on course and avoid this crisis all together? Although sometimes unavoidable, here are some proactive tips to help you save up for your tax bill. Think of it as a Taxes Rainy Day fund–quite fitting given that taxes are due in April anyhow.
1 – Have your employer withhold your taxes for you
Most likely, if you’ve begun a brand new job, your employer would have asked you fill out Form W-4, Employee’s Withholding Allowance Certificate. Aside from being a relatively short and simple form, filling this out correctly can do wonders by allowing your employer to withhold the appropriate amount of taxes from your paycheck so you don’t have to worry about making estimate payments or getting surprised by a large bill come tax day.
2 – Put money aside in a savings account
Out of sight and out of mind…that is until your taxes are due of course. If you’re the type of person who sees a bunch of $$ in their bank account and spends it all, you may want to consider putting aside some money in a savings account to ensure there’s enough funds available to pay for your taxes later down the road.
3 – Pay Quarterly Estimates
Taxpayers with income that is not subject to withholding may be legally required to make quarterly estimate payments to avoid underpayment of tax penalties. However, just because you are not required to make quarterly estimate payments, doesn’t mean you can’t. If you have a fear of misspending or just want to be proactive about paying taxes you know will eventually be owed, consider making an estimate payment; That way, you’ll have effortlessly avoided the underpayment penalty and won’t have to worry about forking over any tax payments come April’s busy season.
4 – Invest your money in short-term or low risk investments
Depositing your extra savings into a brokerage account and investing in low risk investments, like mutual funds or treasury bills may allow you to make a couple of bucks for the year and ensure that you have liquidable assets that may be easily converted into cash to pay your tax bill. Just make sure you’re also reporting any gains and losses on your tax return.
5 – Fund your retirement account sooner rather than later
One of the perks of many deductible retirement plan contributions (e.g., traditional IRA’s, SEPs, etc.) is the ability to make the contributions after December 31st, and have them apply for the current year. However, if you have a tricky cash flow situation in which you currently have funds, and know you are going to be tight on cash during tax day, there is no reason you can’t make the current year contribution now. Consider the timing of deductible tax contributions you make in helping you maximize your tax savings, while ensuring you still have enough money on hand to make your tax payments.
6 – Make your everyday expenditures count towards tax savings
Most people can’t go a day without spending money–whether it’s on food, transportation, bills, etc. People don’t just work to make a bunch of money only to not spend a dime of it anyhow. Seeing as how it’s only natural to spend, spend, spend; Why not make those everyday purchases count towards potential tax savings? Consider keeping track of expenses that can positively affect your taxes, such as higher education tuition and fees, medical bills, job hunting expenses, receipts with sales tax, and so on.