Proper tax planning is a crucial aspect of financial management that should be addressed throughout the year. Waiting until April to assess your tax liability is a risky move. To ensure you keep more money in your pocket, it’s essential to be aware of factors that can unexpectedly raise your taxes. Today we will explore five key factors that could potentially increase your tax owed at the end of the year. By being proactive and considering these factors, you can better plan your finances and mitigate tax surprises.
Factor #1 – Cashing in Your Retirement Plan: Early withdrawal from your retirement plan, such as a 401(k), can lead to significant tax penalties. If you opt to receive the proceeds in cash instead of rolling them over into an Individual Retirement Account (IRA), you will be required to pay taxes on the withdrawn amount. Additionally, a 10 percent penalty may apply if you are younger than 59 1/2. By avoiding these pitfalls, you can safeguard a substantial portion of your hard-earned retirement savings.
Factor #2 – Working as a Freelancer: While freelancing offers independence and flexibility, it can also introduce complex tax implications. Freelancers and self-employed individuals are subject to the self-employment tax, which includes both the employer and employee shares of Medicare and Social Security taxes. Failing to account for this tax burden and set aside funds accordingly can lead to unpleasant surprises come tax season.
Factor #3 – Failing to Take Your Required Minimum Distribution (RMD): Retirement accounts, such as IRAs and workplace plans, require individuals to begin withdrawing minimum distributions once they turn 72. Failing to meet this requirement can result in substantial tax penalties. It is crucial to stay informed about RMD rules and ensure compliance to avoid unnecessary financial setbacks.
Factor #4 – Skipping Your IRA Contribution: Opting to skip your annual IRA contribution can have unforeseen consequences for your tax bill. Before deciding to forgo contributing to your IRA, it is prudent to evaluate the potential impact on your overall tax liability. Running the numbers and seeking professional advice can help you make an informed decision.
Factor #5 – Paying Off Your Mortgage: While paying off your mortgage may provide a sense of financial freedom, it can affect your tax situation. Mortgage interest is typically tax-deductible if you itemize your deductions. Losing this deduction could potentially increase your tax liability. It’s an important consideration to keep in mind.
Seek Professional Assistance for Tax Debt Cases: If you find yourself owing back taxes, it is crucial to seek professional assistance to navigate the complexities of tax debt resolution. Our firm specializes in helping individuals negotiate with the IRS and we can potentially settle tax debts for a fraction of the amount owed. Contact us today for a confidential consultation, providing you with peace of mind.
Year-round tax planning is essential to minimize surprises and optimize your financial well-being. By being aware of factors that can unexpectedly raise your taxes, such as early retirement plan withdrawals, self-employment tax obligations, missed required minimum distributions, skipped IRA contributions, and the impact of mortgage payoff, you can take proactive steps to manage your tax liability effectively.