Avoiding a surprise tax bill
Avoiding a surprise tax bill – 04/22/22
After a year of strong stock market gains, many taxpayers are feeling the pain of having made a lot of money in 2021. If you sold stock last year, you know what I’m talking about. You recorded the gains and so did the IRS. This has caused many to have to make a surprise payment to the IRS. What can you do?
Playing catch up
Ask any CPA and they’ll tell you that the last two years have been crazy with last minute tax law changes, huge backlogs at the IRS, staffing shortages, and unusual changes to client incomes. While many people feel like COVID is behind us, the disruptions have not disappeared yet. Add to that the fact that for the first time in two years there are no automatic extensions, and you can see why it is another crazy tax filing period.
Not paying enough tax
Throughout the year most taxpayers either have tax withheld from their paychecks or make Estimated Tax Payments to the government. That way, when it is tax time, you’ve already paid the IRS most of your tax that is due. However, job changes, a change in family size, sales of appreciated stock, a home sale, a change in bonus or commission income can all make planning tax payments difficult. And, if you don’t pay enough, the IRS can penalize you for underpayment.
At tax time when your tax return is prepared, the exact amount owed is calculated and, hopefully, it is close to the amount withheld or paid during the tax year. If you did not pay enough, you’ll have to make an additional payment at tax time. While most people receive a refund, this year more people are having to make an extra payment when filing their returns.
Avoiding the tax surprise
If you have just filed your tax returns, now is a great time to take steps for the 2022 tax year. If you receive most of your income from a salary (W2 income), you can increase the amount withheld from every paycheck by completing IRS Form W4 form and submitting it to your employer: https://www.irs.gov/forms-pubs/about-form-w-4 This can reduce or eliminate a tax payment next April. Be sure to consider any changes to your income or family situation. For example, if you are retiring on July 1st, you’ll no longer have taxes withheld by your employer. If you have the option for withholding from pension income, consider signing up now. Alternatively, you may want to consider making Estimated Tax Payments. You can find out more about making these payments at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
Start planning your 2022 taxes now
It’s a good idea to sketch out now what your income will look like for the rest of this year. Will it be higher or lower? Will there be changes to your finances or family situation? Are you planning to exercise stock options or restricted stock units (RSUs)? All of these can change your expected tax bill. By mapping things out now, you should have a better idea of what your tax bill will be next year.
So far this year the US and foreign stock markets have been down. If this situation persists, there may be opportunities to sell stock at a loss to capture a long-term capital loss. This may be possible if you paid more for the stock than its current price. Realizing a capital loss can help to offset capital gains that you may have with other holdings. The rules around matching gains and losses can be tricky so, be sure to consult with your CPA or us before transacting.
‘Still have questions about reducing your tax bill? Give your CPA a call next week, after he/she has had a chance to recover from the April deadline. Or, you can call us. We’re here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
Click HERE to receive our award-winning newsletter. We never share your info and you can unsubscribe at any time. Check out more blogs from us at www.PlanWithFPS.com/blog ·
7 tax moves to do now https://planwithfps.com/blog/7-tax-moves-to-do-now
Tax credit or tax deduction https://planwithfps.com/blog/tax-credit-or-tax-deduction
What to do with your tax refund https://planwithfps.com/blog/what-to-do-with-your-tax-refund
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.