Q: I’ve just completed by initial run through of my taxes and it’s showing I owe a lot more than I expected. And I won’t have the funds to cover it by the tax deadline. What should I do?
A: With some COVID-19 era tax breaks going away, many people may find themselves owing more on their 2022 taxes than in the past couple years. Here’s what you need to know for any unpleasant surprises with your tax filing.
According to the IRS, the average refund last year was nearly $3,200. That was up from about $2,800 in 2021. Tax experts say refund amounts this year will more likely resemble refunds from 2019 or 2020. Depending on a taxpayer’s situation, tax experts say refunds could shrink by a few hundred to a few thousand dollars.1
Federal Stimulus Checks Dry Up
The biggest reason tax refunds may be smaller this year is because Congress did not hand out COVID-related federal stimulus checks in 2022. While most taxpayers received their stimulus checks automatically, some got the money as a recovery rebate credit of $1,400 per person on their 2021 income tax return. That means that for a family of four, that $5,600 credit won’t be there on this year’s tax return.1
Have you just completed your taxes and discovered that you owe way more than you expected? Don’t panic. There are several ways to bring that hefty tax bill down.
Step 1: Check for Errors
First, go through your return and make sure that you haven’t made a mistake. If you used tax software, note that it checks the math based on what you entered, but it doesn’t know if you entered the right numbers. Common errors include entering a wrong number, adding an extra zero, or entering the same income in two different places.
When looking for errors, the best place to start is a line-by-line check, comparing this year’s return to last year’s return. Of course, some numbers will be slightly different, but the differences should match your raise, reduction in hours, or other life changes. If anything doesn’t match up, take a closer look.
Step 2: Max Out Your Retirement Accounts
If you have money in the bank and don’t want to give it to the IRS, upping your retirement savings could be a solution. Don’t forget that you can still open and contribute to an IRA account up until your filing deadline. The deduction you receive will reduce what you owe. If you have already filed your tax return without maxing out your retirement accounts, don’t worry; you can still amend your return if you make your contributions in time.
Step 3: Check for Other Deductions and Credits
Go back and look for any deductions and credits you might have missed. These could include business expenses, energy efficiency upgrades, child credits, and more.
If you used tax software, you might have found that some questions were confusing or buried, so you might have accidentally skipped over a credit. The best thing to do is to research whether there are credits for any large expenses you had throughout the year that might come with tax incentives.
Step 4: File Your Tax Return Anyway
Don’t neglect to file your tax return because you can’t pay. There are separate and larger penalties for failing to file a return. These include automatic monetary penalties for late filing, as well as the possibility that the IRS thinks that you are trying to evade your taxes because you can’t pay what you owe.
Step 5: Request a Payment Plan
If you can’t pay your tax bill in full, pay what you can. Late payment penalties are based on your outstanding balance, not your original tax bill. Just like paying off a loan, the more and earlier you pay, the less you pay in interest and penalties.
If all else fails, you can request an installment agreement from the IRS. This is a payment plan whereby you make monthly payments and incur slightly lower penalties than those incurred if you don’t pay. The other advantage is that if you make your payments on time, the IRS won’t keep sending you threatening letters or file a tax lien.
Do you need help figuring out how to pay this year’s taxes or how to reduce your future taxes? Talk to your financial advisor today.
Jeremy R. Gussick is a Certified Financial Planner™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBTQ+ community and was recently named a 2023 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBTQ+ organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at [email protected].
Sources:
1https://abcnews.go.com/Business/brace-smaller-refund-covid-era-tax-breaks-expire/story?id=96336570
This content is developed from sources believed to be providing accurate information and provided with the assistance of Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Jeremy R. Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
*As reported by Financial Planning magazine, June 1996-2022, based on total revenues.
**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2022 Five Star Wealth Managers.