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 strategy: "I don't want to owe any money" or "I use my refund to pay down my cards after holiday shopping." The problem with overpaying is that, at a minimum, you're giving the government an interest-free loan of your money - money that you could be using to pay down debt, build up savings, or achieve any of a zillion good purposes. If you've overpaid all year and an emergency comes along in November, you can't ask the government for an advance of your refund to cover it. But you could use that money if you had it in a savings account, or even in a cookie jar. If you're consistently getting a refund check every spring, talk to a qualified tax preparer and go over your situation. You'll likely be able to find a way to cover your taxes (and not owe something on April 15), without overpaying along the way.  (continued...)
Tax-Time - Importance of Staying Out Of Debt With The IRS
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About The Author

Michael Saunders has an MBA from the Stanford Graduate School of Business. He edits a site on Credit Repair and Debt Consolidation and is president of Information Organizers, LLC.

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Edited by: Michael Saunders

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