Tax season is upon us and with it comes stress, anxiety and dread for many. 2020 was especially stressful for many and taxes may feel extra challenging. We’re here to help take some of that stress away! Here are the biggest missteps to avoid and how to handle pitfalls when they do arise.
Misstep #1 Not filing your taxes
If you’re expecting a large tax bill and know you won’t be able to pay, you still need to file. Penalties for not filing are much larger than filing and not paying on time. Not filing results in a 5% monthly late fee, up to 25% of the bill, plus interest. Filing and not paying on time only accrues a 0.5% late fee per month, also capped at 25% plus interest. You’ll still eventually have to pay, but your late fees will be considerably lower.
Misstep #2 Using credit to pay off taxes
Instead of racking up credit card interest, apply for an IRS payment plan. You’ll still accrue penalties and interest, but when you sign up for the installment plan, the monthly late fee drops to 0.25%. Future tax refunds will be applied to your balance but the IRS won’t take any further action against you and you’ll avoid wage garnishment or liens on property.
Misstep #4 Taking a withdrawl on your retirement funds
Again, applying for an installment repayment plan is by far the best route to go, but if you absolutely must withdraw from your retirement funds, seek out a 401(k) loan. A full 401(k) withdraw will result in more taxes. You’ll pay a 10% penalty and that money will also be taxed as regular income. With a 401(k) loan, you won’t be penalized.
Taxes can be a source of monumental stress, but by avoiding these missteps, you’ll set yourself up for success and easy resolution.