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How to Prevent Taxing Mistakes
By Marie Cooper
Even if some parts of the tax system are hopelessly and unreasonably complicated, there’s no reason why you can’t learn from the mistakes of others to save yourself some money. 1. Seeking advice after a major decision. Too many people seek out information and hire help after making a decision, even though seeking preventive help ahead of time generally is wiser and less costly. Before making any major financial decisions, educate yourself. 2. If you’re going to hire a tax advisor to give advice, do so before making your decision(s). The wrong move when selling a piece of real estate or taking money from a retirement account can cost you thousands of dollars in taxes! Failing to withhold enough taxes. If you’re self-employed or earn significant taxable income from investments outside retirement accounts, you need to be making estimated quarterly tax payments. Likewise, if, during the year, you sell an investment asset at a profit, you may need to make a (higher) quarterly tax payment. Not having a human resources department to withhold taxes from their pay as they earn it, some self-employed people dig themselves into a perpetual tax hole by failing to submit estimated quarterly tax payments. They get behind in their tax payments during their first year of self-employment and thereafter are always playing catch-up. Don’t be a “should’ve” victim. People often don’t discover that they “should’ve” paid more taxes during the year until after they complete their returns in the spring — or get penalty notices from the IRS and their states. Then they have to come up with sizable sums all at once. To make quarterly tax payments, complete IRS Form 1040-ES, Estimated Tax for Individuals. This form and accompanying instructions explain how to calculate quarterly tax payments — the IRS even sends you payment coupons and envelopes in which to mail your checks. Although the IRS — want you to keep your taxes current during the year, they don’t want you to overpay. Some people have too much tax withheld during the year, and this overpayment can go on year after year. Although it may feel good to get a sizable refund check every spring, why should you loan your money to the government interest-free? 3. When you work for an employer, you can complete a new W-4 to adjust your withholding. Turn the completed W-4 in to your employer. When you’re self-employed, complete Form 1040-ES, Estimated Tax for Individuals. If you know that you’d otherwise spend the extra tax money that you’re currently sending to the IRS, then this forced-savings strategy may have some value. But you can find other, better ways to make yourself save. You can set up all sorts of investments, such as mutual funds, to be funded by automatic contributions from your paychecks (or from a bank or investment account). Of course, if you happen to prefer to loan the IRS money — interest-free — go right ahead!
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