Proper tax planning is a year-round proposition. You cannot afford to wait until April to start planning your taxes and assessing your tax liability.
Knowing which factors can raise your taxes is one of the best ways to keep more money in your pocket. These five factors can unexpectedly raise your taxes owed at the end of the year.
Note: If you owe back taxes, our firm can help negotiate with the IRS and potentially settle your tax debt. Call us today. Our tax resolution legal team can navigate the IRS maze so that you have nothing to worry about.
#1 – Cashing in Your Retirement Plan
There are many reasons not to cash in your retirement plan early, but the tax penalty is one of the biggest ones. If you take the proceeds from your 401(k) plan in cash instead of rolling it over into an IRA, you will have to pay taxes on the money you withdraw. Even worse, you will be subject to a 10 percent penalty unless certain exceptions apply. By the time you are done, you could lose up to half your hard-earned retirement plan to taxes and penalties. You will also lose the opportunity for that money to compound tax free while it’s in your retirement plan. Think twice before cashing in the money in your retirement plan.
#2 – Working as a Freelancer
Working for yourself is great, but it can trigger a tax nightmare. Freelancers and other self-employed workers are subject to the self-employment tax, which represents the combined employer and employee share of the Medicare and Social Security tax. That tax hit can be substantial, especially if you plan to fail to plan for it and set money aside.
#3 – Failing to Take Your RMD
You cannot keep retirement funds in your account indefinitely. The law has changed. Previously, you are required to start pulling money from your IRA and workplace retirement plans when you turned 70. However, the law was changed and now if your 70th birthday is July 1, 2019 or later, you do not have to take withdrawals until you reach age 72. Warning: if you fail to make that required minimum distribution (RMD), you could face a hefty tax penalty. The penalty for failing to take the RMD can be substantial.
#4 – Skipping Your IRA Contribution
If you are used to making an annual IRA contribution, skipping that contribution could cost you money. Before you skip your IRA contribution, take the time to run the numbers and see how the decision will affect your tax bill.
#5 – Paying Off the Mortgage
Paying off the house can be very freeing, but it can also raise your taxes. Mortgage interest is deductible if you itemize your deductions, and losing that deduction could leave you owing more to the IRS. That may not be a reason to keep a mortgage, but it can be an important consideration. Remember that the changes in standard deduction has meant that many people who previously itemized deductions under the current tax law now used the standard deduction. The point here is you should plan and run the numbers.
Owe Back Taxes?
If you know you’ll have outstanding tax debt and owe more than $10k to the IRS or state but can’t pay in full, contact our firm today. We help people find tax relief and sometimes settle their tax debt for a fraction of what’s owed.