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Avoiding Taxes: Essential Tips and Changes for 2022

Reasons for Owning Taxes in 2022

Taxes are one of the few certainties in life, and overlooking your tax obligations can lead to a lot of financial troubles. Avoiding taxes is illegal and is sure to cause problems with the IRS.

Often, people end up with a hefty tax balance due to various reasons. Below are some common reasons for facing a significant tax bill that will help you avoid similar issues.

Claimed Too Few Allowances

The human resource department usually provides a W-4 form to employees, which assists them in determining the number of allowances they should claim for tax purposes. The amount of money withheld from an employee’s paycheck for federal taxes is determined by the W-4 form.

If the employee claims too few allowances, too much tax will be withheld from their paycheck, resulting in a high tax bill or smaller take-home pay. To avoid this, make sure to review your W-4 periodically and update allowances according to life changes.

Self-Employment and Side Hustles

Although self-employment or having a side hustle is a commendable effort, it comes with added responsibilities in terms of taxes. Freelancers and self-employed individuals are required to make estimated quarterly payments on their tax liability.

Overlooking estimated quarterly payments will lead to substantial tax balances due at tax filing time. It is always best to keep track of your earnings and factor in the amount of taxes owed.

This way, you won’t have to worry about surprise tax liabilities.

Major Life Changes

Life’s major changes or events, such as marriage, home purchase, or job transition, come with their respective financial responsibilities, including taxes. An increase in income due to a new job means a change in tax brackets, which affects your tax liability.

A significant life change might mean that the taxpayer is eligible for new credits or deductions, lowering their overall tax liability. For example, homeownership offers benefits such as mortgage interest deductions, property tax deductions, and energy credits.

Therefore, it’s essential to keep track of life changes that might affect your tax liability to avoid being hit with a surprise tax bill.

Pandemic Relief Changes

The Covid-19 pandemic brought about economic changes that affected almost all aspects of life, including taxes. The government introduced various tax relief measures to help individuals and businesses weather the storm.

However, these relief measures might have significant implications come tax season.

Tax Credit Changes

Stimulus payments, increased charitable donations, earned income credit, child tax credit, and dependent care credit are popular tax credits that have experienced significant changes in recent times. The following are changes that are important to keep in mind.

Stimulus payments

The American Rescue Plan Act authorized stimulus payments to qualified taxpayers to help them recover from the pandemic’s economic impact. Unlike the previous stimulus payments, these payments do not need to be paid back to the IRS if you are eligible.

However, some individuals might be required to pay part or all of the stimulus payment back due to changes in income and other factors.

Charitable donations

The government introduced a pandemic relief charitable contribution deduction to incentivize charitable giving during the pandemic. Taxpayers are now allowed to claim $300 in charitable deductions, even if they do not itemize their deductions.

Earned Income Credit

The

Earned Income Credit (EIC) is a tax credit geared towards low-income families. The maximum amount and income level to qualify are subject to change based on various factors, including family size and income.

Child Tax Credit

The child tax credit amount has been increased, and previously non-refundable credit is now partially refundable. The credit might further increase or undergo other changes based on congress’s consideration in upcoming tax bills.

Dependent Care Credit

The

Dependent Care Credit allows individuals and families to claim credits for child care expenses. Changes in income levels might affect the amount of credit you can claim.

In conclusion, understanding the various reasons for accumulating a significant tax balance and changes in pandemic tax credits is essential. Being proactive with one’s tax planning and obligations could save an individual time, stress, and money during the tax season.

Remember to consult with a tax consultant to ensure that you are tax-compliant and to take advantage of new relief measures.

Avoiding Tax Owed

One of the biggest financial challenges many people face is unpaid taxes. Unpaid taxes can result from miscalculating the amount of taxes owed or from failure to correctly report all income earned.

If you owe taxes, it is critical that you take the necessary steps to avoid penalties and interest and also to minimize your tax bill. Fortunately, there are steps you can take to avoid owing taxes and penalties or reduce the amount that you owe.

Some of these steps include adjusting your withholdings or estimated tax payments.

Adjusting Withholdings or Estimated Tax Payments

Your tax liability ultimately depends on the amount of income that you earn. If you find that you owe taxes because you did not have enough money withheld, you can adjust your withholdings to ensure that you have the correct amount of taxes withheld from each paycheck.

On the other hand, if you receive income from non-wage sources such as investments or self-employment income, it is important to make estimated tax payments throughout the year to avoid penalties. It is important to note that if you do not have enough money withheld or do not make adequate estimated payments and thus owe money in taxes, the IRS can impose penalties and interest on the balance due.

Failure to pay taxes owed, even if it is due to a miscalculation or financial hardship, can negatively impact your credit score and result in wage garnishment or liens. It is important to avoid these negative consequences by taking proactive measures to pay taxes owed.

Significant Life Changes

Major life changes, such as marriage, divorce, birth or adoption of a child, or job loss can all have an impact on your taxes. For instance, getting married may offer you a joint filing status, which can result in a lower tax bill.

Divorce, on the other hand, may affect your tax liability, especially if there is alimony or child support involved. The birth or adoption of a child can also have tax implications.

For instance, you may be able to claim a child tax credit or qualify for other tax benefits related to the care of a dependent child. Furthermore, having a new job comes with a lot of responsibilities, including taxes.

You need to ensure that your new job changes do not affect your tax liability. When significant life changes occur, it is essential to update your tax withholdings or make estimated tax payments.

By doing so, you can avoid withholding too much or too little and prevent unexpected surprises come tax season.

Penalties

The IRS imposes penalties and interest on unpaid taxes, and these fees can add up quickly. For instance, if you file a tax return after the deadline and owe taxes, you could face a penalty of 5% of the unpaid tax bill for each month the return is late.

The maximum penalty is 25% of the unpaid tax bill. Additionally, if you do not make estimated tax payments or withholds too little, you may face an underpayment penalty.

The penalty is calculated based on the amount owed and how long the tax goes unpaid. The interest accrues daily and compounds daily until the tax is paid.

To avoid penalties, it is critical to make timely payments, file your tax returns on time, and report all of your income accurately. To avoid further complications and potential penalties, it is best to consult with a tax professional to avoid issues with the IRS.

Conclusion

In conclusion, it is crucial to be proactive in your finances and tax planning. Adjusting your withholdings or estimated tax payments and ensuring that major life changes are taken into account can help avoid unpleasant surprises come tax season.

Remember that penalties and interest can add up quickly, so making timely payments and accurately reporting all your income is critical in maintaining your financial health. It is always best to seek the help of a tax professional for guidance on tax laws, deductions, and credits to ensure you are making the best decisions for your financial situation.

In summary, avoiding unpaid taxes is crucial to maintaining financial stability and avoiding negative consequences such as penalties, interest, or even legal action. The article has highlighted the importance of adjusting withholdings or estimated tax payments to ensure accurate tax payments and avoiding surprises come tax season.

Major life changes can also impact your tax liability, and it is essential to report these changes and update withholdings or make estimated tax payments accordingly. Finally, seeking the help of a tax professional can provide guidance on tax laws, deductions, and credits to help make informed financial decisions.

Overall, it is crucial to be proactive in tax planning to avoid complications, penalties, and interest, which can negatively impact your finances.

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