A surprise birthday party is worth celebrating. A surprise on your tax bill? Not so much.
Since 2021, an increasing number of Americans have unexpectedly owed more or got less money back after filing their taxes. To avoid any unwelcome surprises, it’s important to be as prepared as possible when it’s time to file your taxes.
Understanding your tax obligations
Your tax liability is the amount of taxes you owe, which includes income taxes on earnings and capital gains taxes when you sell assets that increased in value. Understanding your tax obligation can help with budgeting and maximizing deductions or credits.
Know your tax bracket
Tax brackets determine how much you owe based on your taxable income. The seven tax brackets each have a different tax rate ranging from 10% to 37%. Since the Internal Revenue Service (IRS) adjusts tax brackets every year, it’s important to stay up to date on the latest figures.
Familiarize yourself with tax deductions and credits
A tax deduction is an accrued expense you can subtract from your income to reduce your overall tax bill. These include:
Charitable donations
Medical expenses
Health insurance
Educational expenses
State and local taxes
Credits can also reduce the amount you owe or increase your tax refund. Find which deductions and credits you’re eligible for on the IRS website.
Strategies to prevent surprise taxes
Proactive planning helps reduce the chances you're going to owe more than anticipated or receive less than expected.
Read more: Ally Bank’s buckets and boosters can help you save ahead of tax season.
Adjust your withholding
Withholding is the amount of tax withheld from your paycheck. This amount depends on:
The amount of income you earn
The information you provide your employer on Form W-4, including filing status, withholding allowances and additional withholding
You can, and should, review your federal withholding each year to ensure you don’t have too much or too little tax withheld — especially if you went through a salary change during the year.
You can, and should, review your federal withholding each year to ensure you don’t have too much or too little tax withheld.
Estimate your tax payments
Online calculators or tax professionals can help you accurately estimate your tax payments. Review your estimated taxes throughout the year to determine whether estimated payments need to be made to the IRS to avoid interest and penalties.
Keep accurate financial records
When it’s time to file, you might have dozens of documents and receipts to report. It’s important to keep an accurate record of your income, expenses and other relevant financial paperwork. You can stay organized by:
Maintaining a record of income sources, expenses and charitable contributions
Scanning or photographing your documents
Keeping a list of all the accounts you have in your name that you could owe taxes on
Things that can affect your taxes
A variety of factors can impact how much you owe, including:
Under-withholding
Self-employment income
Stock trading and capital gains
Changes in tax laws
Unreported income like tips or money earned from a side gig
Life changes like getting married, having a child or buying a home
Penalties and interest
Reasons why your tax refund may have been lower (or your tax bill higher) than expected
It can be disappointing and stressful to receive a smaller tax refund — or a tax bill that was larger than you anticipated. Typically, people owe more or receive less because they didn't have enough withheld from their paycheck or experienced a significant change in their financial situation. A smaller tax refund could also be due to other circumstances such as:
Overdue federal tax debts (the IRS can offset refunds due to taxpayers with tax debts from other years)
Past-due child or spousal support
Federal agency nontax debts
State income tax debts
Unemployment compensation debts owed to a state
Student direct loan and guaranteed loan repayments
Small Business Administration (SBA) loan repayments
Department of Housing and Urban Development (HUD) loan repayments
Employ professional help
Filing your return, navigating tax laws and understanding deductions can be overwhelming. Professional help could be the key to getting through tax season without any surprises.
Consult a tax advisor
A certified tax professional can save you money and time while giving you peace of mind. Since it’s their job to stay informed on tax laws and regulations, they can answer any questions you have and ensure you get all the deductions or tax credits you are eligible to receive.
Use tax preparation software
You can leverage tax preparation technology to streamline the filing process and save money. When deciding which software is best for your specific tax situation, consider cost, ease of use and live support capabilities.
No more sticker shock
Taxes might be inevitable, but a surprise tax bill is not. By understanding your tax obligations and employing strategies to prepare, you can anticipate a predictable tax season.
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