It is not too late to reduce your tax bill on April 15, 2014. As long as the below adjustments occur before December 31, 2013, you may be able to avoid or reduce a back tax liability if you have under-withheld. Before relying on any of the below information, you must contact a tax attorney or CPA to discuss your individual tax situation.
A refund indicates that you are paying too much tax and a tax debt means that you are paying too little. Most wage earners with a tax problem with whom I consult have had insufficient taxes taken out of their paycheck. The goal of withholding is to be as close to breaking even as possible.
If you are withholding too much, then you are providing the government with an interest free loan. If you have under-withheld, then you must contact your HR department immediately before accruing a significant back tax liability. You must adjust your W-4 to reflect the proper amount to be withheld from each paycheck. The failure to properly withhold can result in the IRS garnishing wages, levying bank accounts, or seizing assets. Additionally, the IRS can assess with tax penalties such as the failure to pay or an estimated tax penalty. Furthermore, if you have negotiated an IRS installment agreement or the IRS has accepted an offer in compromise (tax settlement), then the failure to properly withhold may result in a breach of your agreement. All IRS negotiations require a taxpayer to be compliant. Tax compliance requires withholding the proper amount of tax or making estimated tax payments. As a tax attorney that handles IRS collection and tax controversy exclusively, the toughest thing to watch is when the IRS accepts a tax settlement and years later the IRS reinstates the back tax due to noncompliance. If you have not read my blog titled “What is an essential component to resolving or negotiating a tax settlement with the IRS,” then here is the link: https://www.irsproblemsolve.com/2013/09/negotiating-tax-settlement-with-irs/.
Reduce your Taxable Income to Avoid Back Taxes
If you have under-withheld, then below pre-tax deductions may help.
401k, FSA Account Contributions, and Year-End Bonus
If you did not max out your 401k contribution, then you can make a last-minute contribution of up to $17,500.00. Be careful with FSA contributions this late as those funds may not be available for spending in 2014.
If you realize that you have not taken enough out of taxes and are due a bonus, you may want to defer the bonus until January 2014. As a cash basis taxpayer, you can delay the payment of taxes until 2015 by receiving the payment in the 2014 tax year instead of 2013.
Increase Charitable Giving
If you have a large item, such as an automobile, mutual funds, or stocks, that are no longer serving your current lifestyle or portfolio goals, consider donating them to a charity before December 31. These offer large tax write-offs and the charity selling your investments saves you from a capital gains tax. If the shares were held for a year or less, then shares would be treated as “ordinary income property” and your charitable deduction would be limited. Charitable giving is incredibly complex and you must speak with a CPA or tax attorney before executing the above strategy.
Pay College Expenses Now
Tuition may not be due until January, but paying it now means it can be written off for 2013 as an American Opportunity Tax Credit.
The content of this blog is intended to convey general information only and not to provide legal advice or opinions. The above strategy should not be relied upon for, legal or tax advice in any particular circumstance or fact situation. A tax attorney or CPA should be consulted before taking advantage of any of the above suggestions. If you have under-withheld taxes and are experiencing IRS tax problems then, contact the law office of Todd S. Unger today! Todd S. Unger, Esq. is a tax attorney who can be reached at (877) 544-4743.