Nobody likes surprises during tax season, especially if it means you owe taxes. In this week’s video, Casey discusses why you might owe money, what you can do about it, and why it might not be a bad thing.
While getting a tax refund might feel good, it means you got less than you could have in each of your paychecks. Whatever path you choose, it’s important to communicate with your tax and financial professionals throughout the year to make sure you aren’t in for a surprise come tax time next year.
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What to Do if You Owe Taxes? – Mullooly Asset Show – Full Transcript
**Click here for a full downloadable PDF version of this transcript**
Casey Mullooly: What should you do if you owe money on your taxes? Keep watching to find out. Welcome back to the Mullooly Asset Show. I’m your host, Casey Mullooly. Happy to be back with you, here, for another episode.
We’re in the middle of tax season here, and hopefully, you’re not in for a surprise, but what if you are? What if you end up owing money, and didn’t expect it? What should you do? What caused it? What should you do to better prepare for next year? I’m glad you asked.
When you owe money, what that means is you’re under-withheld on your income. The most common reason is because you didn’t withhold enough from your paychecks, and unfortunately, if you owe money this year, the only way to remedy that is to settle up with the government, and pay them what you owe. If it’s not a large amount of money, we’re talking $100, maybe, a couple $100 or less, then that doesn’t necessarily mean that there’s anything to do about it.
In fact, it could be a good sign. Well, getting a large refund at the end of the year might feel good, might feel nice to get a large sum of money. That’s your own money that could’ve been coming to you in your paychecks, instead. The best outcome is getting neither a refund, nor owing money. If you could get a zero, that would be perfect. If you are over-withheld, that’s less money in your pocket each paycheck. You got to strike that balance. You really want to find the balance between getting the most money you can, in your paycheck, while also not owing money at the end of the year.
Let’s say you owe money, and you want to take care of it. How should you do that? Well, you should start by getting your tax return out because that’s going to make things a lot easier. Go ahead and get your most recent Form 1040 out, and it’s a pretty simple calculation, really, but you should take your total tax, which is going to be at the bottom of your return, and divide it by your taxable income.
A little math for you there, but simple enough, and that should give you a percentage, or a decimal, which you can then turn into a percentage. Let’s say it’s 19%. Well, you take that number, and you go to your employer. You go to the HR department.
They might have you fill out a form that’s called Form W-4, but if not, you can explain the situation to them. Tell them that you want to increase your paycheck withholdings to 20%, a little bit higher than 19%. Give yourself a little bit of wiggle room there, especially if you don’t want to owe any money, but explain to them that you want to increase the withholding.
It might take a pay period or two to kick in, but that should fix your situation for next year. You might owe money because you have more income than you expected. Maybe, you got a raise at work. Maybe, you changed jobs, and took a step-up in your pay, and didn’t adjust your withholdings, accordingly. Maybe, you changed filing statuses. Maybe, you got married during the year or divorced during the year.
Maybe, you had other unforeseen income come in. You took portfolio distributions, and didn’t withhold any money there. There’s a number of different reasons, but the good news is that, with a little better planning and a little more communication with your tax professional, you can remedy all of this, moving forward, and hopefully, not owe any money, come next year.
It’s important to remember. It’s important to know that you can change your withholdings on your paychecks, and it’s important to also remember that we’re not tax professionals here. We don’t prepare tax returns for our clients.
We are very well-versed in this area, but we’re not tax professionals, so please consult with one before you make any changes, and please communicate with your tax professionals throughout the year so you don’t have a surprise, come tax time. That is the message for this week’s episode. Hope you enjoyed it.
Hope you got some good takeaways for your taxes, come next year. Thanks, as always, for tuning in. We’ll be back with you next week.