How to Avoid Tax Debt
The best way to avoid tax debt is to pay estimated taxes on time and file your personal tax return by April 15th. If you fall behind or pay late, you will incur a penalty. If this happens, make sure you pay the amount owed and the penalty quickly.
You can request an extension of up to 120 days, but you need to do so prior to the April 15th filing date. Should you still not be able to pay your tax bill as the end of the extension grows closer, pay as much as you can of the outstanding tax bill, then think of ways in which you can raise the money. Sell off an investment, borrow against your 401(k) or life insurance, sell an asset or (if this is a temporary financial situation) take a cash advance on a credit card or even a bank loan. A personal loan from family or friends can also be very helpful when it comes to paying taxes.
To keep yourself on the right track, make sure you keep good records of your income and save receipts to support your deductions. In addition, set up a calendar to determine when you need to make payments and file your return. This is particularly important if you are filing quarterly estimates.
If you work for an employer, make sure you are withholding enough to cover your tax bill and have some cash in liquid accounts in case you are not sure. If you earn money outside of your employed position, then adjust your withholding to have more withheld and/or put one-third of that money aside for tax purposes. Be diligent about your tax bill whenever you make money -- do not forget about taxes until April 15th is approaching. Make a concerted effort to stay on top of your tax situation throughout the year.
Should you be unable to pay your entire tax bill, and see a tax debt mounting, you can arrange with the IRS after filing to set up an installment agreement. This would allow you to pay in monthly installments. In addition, any refund would be turned back over to the IRS to be applied against the debt owed. Installment agreements are more costly since there are penalties and interest charged on the potion of the debt that is still owed throughout the duration of the installment agreement.
Although the IRS can be intimidating, they are the source of all tax information and the best place to turn as soon as you fall behind with tax payments. Check out the IRS site. Paying minimal fines is nothing compared to a mounting tax debt. Have an accountant or tax attorney help you gather your paperwork and with their assistance contact the IRS for options. The idea is to curtail tax debt early on by finding a system of making payments. Do not ignore a mounting tax debt or trust places that claim to be able to magically get you out of debt -- they can't.
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