Tax-Time - Importance of Staying Out Of Debt With The IRS

 by: Michael Saunders

Typically, your employer deducts or withholds income taxes from your paycheck based on the number of your deductions. The deductions reflect an estimate of what you'll owe - but most people end up either paying something more to the IRS or getting a tax refund with money back.

You may have income not subject to withholding, such as dividends, interest, income from side businesses, tips, stock gains, gambling winnings, money paid to you as an independent contractor, small-business income, forgiven debts, hobby income, rents, and gifts above a certain dollar level. Because you haven't paid out taxes from these streams of income, be sure that you prepare yourself for that inevitability.

As you do your planning, you can choose one of three approaches to what is called general tax-planning: Overpay, underpay, or strive to pay just the right amount. You can probably already guess which strategy is the right one (yes, the latter).

Overpaying your withholdings: Many people say that they deliberately overpay their taxes as a budgeting s