Tax season means different things for different people. Some are eager to get that W2 while others dread every tax filing season. While most Americans will get a refund each year, there are those who pay Uncle Sam every tax season. For these individuals, tax season is to be dreaded. However, there are usually four major reasons why people fail to get a refund or have to pay the IRS each year – could one of them affect your ability to get a refund each year?
- You aren’t holding out enough on your normal paycheck.
If you’ve been at your job for a while, you may need to fill out an updated W-4 form. Many life changes can affect the amount of taxes taken out of your weekly or bi-weekly paycheck. If you filled out your W-4 a few years ago and you no longer have the same amount of dependents, be sure to see your personnel department in order to have the right amount of taxes removed from your paycheck so you don’t have to pay Uncle Sam at the end of the year.
Plus, there’s also the possibility that you don’t have the allowances filled out properly on your W-4. You may have incorrectly filled out something that personnel didn’t catch. Some people think its wise to claim themselves or to claim no one on their W-4. However, if you’re not having enough withheld each pay period, you can bet you will not get a refund during tax season.
If you’re confused about how much to have held out, look at how much you’re having to pay the IRS this tax season. Divide that amount by the frequency of your paycheck (52 weeks or 26 weeks). Ask your payroll department to have that amount taken out each pay period. Sometimes, you may only need to have them hold out an extra $10 or $20 in order to come out even at tax time.
- You’re working a second job where the wages aren’t taxed.
Freelancers love being able to work a side job in their free time. They can set their own hours, and they can work as needed. This is especially true for freelance writers or for those who operate a ride-share program such as Lyft or Uber. However, the IRS sees these individuals as self-employed. You’ll not only have to pay income taxes on these wages, but you’ll also have to pay social security and medicare taxes.
One way to get ahead of this, particularly if you make a great deal of money at a side hustle, is to pay your taxes quarterly. However, if you don’t feel this is feasible, you can always set aside a small amount each month that you will have ready at the end of the year to pay these taxes.
- You have made significant income with a brokerage account.
Investments are recommended for anyone looking to make passive income. However, any time those investments are sold for a profit, the stock holder will have to pay taxes on that gain.
It’s hard to predict how to hold back any of this money in order to pay taxes at the end of the year. Some investors rarely sell, but those who have frequent gains from the sale of stocks should consult a financial expert on how to best prepare for the taxes one will have to pay.
- You aren’t claiming the right deductions or tax credits.
Many taxpayers aren’t claiming all the deductions that they are eligible for. One of the boons of hiring a tax professional to assist with completing one’s taxes is their expertise on tax credits and tax deductions. It is part of their job description to point clients in the direction of these methods of saving money. However, some Americans will utilize free filing on the internet and input their tax information themselves. While many of these software programs will assist with making the right tax deductions or credits, there are those that don’t. So, if you aren’t sure, a tax professional may cost more than those e-filing software programs, but they can save you money in the long run.