Personal Finance

How To Break Even On Taxes

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 6 minute read

Although millions of Americans receive tax refunds each year, is this the greatest use of their funds? For many taxpayers, the start of tax season on January 24th for the 2022 filing season is a special occasion. For tax year 2021, the Internal Revenue Service (IRS) will begin collecting and processing returns beginning in March 2019. However, why do many look forward to tax time? How To Break Even On Taxes? The IRS issued $355 billion in refunds for the 2021 tax filing season, with an average direct deposit refund of $2,851 per taxpayer.

Every year, tens of millions of people are overjoyed to learn that they will be receiving a tax refund. Tax refunds are the result of underpaying your taxes, which is a fact that you should be aware of. Even though this can be done on purpose as part of a comprehensive tax preparation strategy, it’s more commonly the outcome of underestimating your tax burden and having excessive amounts deducted from your wages each pay period.

Experts disagree on whether technique is best: owing, seeking a refund, or striving for a net loss. As a result, how do you determine what’s best for your family? We’ll help you get to the bottom of this and put an end to this endless conundrum.

When is the ideal time to file a tax return?

When you enter your W2s or 1099s into the calculator, it tells you that you owe taxes to the government. This can make you sick if you weren’t prepared for it.

You’ll owe the IRS if you don’t withhold enough taxes from your paycheck or underestimate your tax burden. Despite the fact that no one likes paying taxes, there are instances when it is the best plan.

Enrolled Agent Steven J. Weil, Ph.D., president and tax manager of RMS Accounting in Fort Lauderdale, Florida, says, “In most circumstances, it’s preferable to owe than to receive a refund”. Most refunds are nothing more than the return of money that the government has stored and spent interest-free for the taxpayer.

Instead of giving Uncle Sam a loan that will never return any interest, would you rather have extra money at your disposal throughout the year to spend as you please? You may put that additional cash to good use by paying off debt, contributing to a retirement account, or  saving for a goal that is dear to your heart.

Is it OK to owe a large sum of money? You must pay income tax throughout the year because of the pay-as-you-go nature of the U.S. tax system. In order to comply with the legislation, employers are compelled to withhold taxes from their employees’ wages. 

Estimated taxes may be required if you have side employment and don’t pay enough taxes via your day job. Self-employed individuals commonly utilize this method of tax payment. If you owe more than $1,000 in back taxes and withhold too little from your paycheck, you may be subject to a tax penalty.

Not paying anticipated taxes might lead to penalties if your debt is too high. According to the guidelines, “we must pay a sum equivalent to the lesser of 100% of our tax due for the preceding year or 90% of our tax liability for the current year, in equal quarterly instalments or through withholding,” adds Weil. So long as you’re compliant, employing lawful tax strategies, and staying out of trouble, owing money might be a smart financial move.

Who this tax strategy is best for:

Planning to pay taxes may be a solid idea if you can make the money work for you and keep track of what you owe. According to CSI Group founder and Chief Tax Strategist Peter J. Greco, CPA, owing taxes is the greatest plan if you have money to settle the tax obligation when it comes due.

In Greco’s opinion, this technique is best suited to persons who have a lot of money coming in throughout the year, can save enough during the year, and have enough money saved to pay the IRS when they owe it. Because there is no punishment for underpaying taxes, the theory goes, “you should owe and put the money to good use”.

When the ideal tax plan is to avoid paying any taxes at all,

In order to avoid overpaying for underpaying taxes, a middle ground exists: a tax plan that results in the best possible balance between the two. Breaking even should not result in owing or receiving a large sum of money, even if you don’t touch zero.

Tax planning that allows you to get as near as possible to breaking even might be the ideal solution. As a result, your take-home income is maximized and you pay just what you are legally required to pay. If you’re concerned about paying the right amount of taxes and avoiding penalties, this is an excellent option.

CPA and financial planner Clare J. Fazackerley advises that the optimum option is to break even, have a modest balance due to the IRS, or receive a little refund. “An underpayment penalty of 5% interest, which is more than you can make investing the money, applies if you owe more than $1,000. owing the IRS more than you can afford to pay leads in interest and penalties being added to your debt.

Regular checkups throughout the year will help you stay on track with your financial goals of owing or receiving as little money as possible. As simply as utilizing the IRS’s tax withholding calculator, you may ensure that your withholdings are in line with your financial goals. Tax time may be stressful, and you don’t want to get a bill that’s out of your reach.

Who this tax strategy is best for:

Most people’s best bet is to aim for a break-even result. Especially those who want to know exactly how much money they’ve earned over the course of a year. For most taxpayers, “the best strategy is to avoid underpayment penalties while still collecting interest on their money,” says Tim Yoder, CPA, a staff writer at Fit Small Business.

When getting a tax refund is the best tax strategy

In other words, if you have too much money withheld from your paychecks, the IRS will not try to prevent you from providing it with an interest-free loan. This is money that you could have used to pay for necessities, put away for the future, or make bigger contributions to your retirement account.

However, if you find it difficult to save money on a regular basis, setting up your taxes such that you receive a return may be a viable option. Consider this option if your take-home wage is sufficient to meet your daily living needs and you’re fine with the government retaining your money without giving you any interest on it.

Greco argues that taxpayers who have difficulty saving money on a regular basis may benefit most from receiving a tax refund. No money, no spending…that’s the rule. Because of this, it’s practically a savings account”,

If you intentionally overpay your taxes in order to save money, don’t toss away your financial wisdom when you get your return. Instead of squandering your tax refund on things you don’t need, think about how you might use it to improve your financial condition.

Who is this tax strategy best for?

In 2021, the average tax refund is $2,851, so you may get a sizable refund if that’s the case. It’s easy to spend your money on things you don’t actually need, rather than the things you need. It won’t assist your circumstances if you waste this money, which isn’t free and is simply your money being returned to you.

It’s not simple to keep track of one’s finances properly. To succeed, you need a strategy and the ability to stick to it. If you know that you would have spent the additional money had you received a tax return, you may want to deliberately overpay your taxes in order to receive a refund each year. While the IRS is holding this money, you won’t be able to earn interest on it, but you may expect to get it if you prepare ahead.

Bottom line

If you have a unique tax situation, there may be no one-size-fits-all method. But maybe this information will help you prepare ahead and avoid a last-minute scramble when it comes time to file your taxes. Avoiding typical tax blunders begins with gaining a thorough understanding of the tax system.

A tax professional may be able to help you determine which method is appropriate for your situation and how to implement it effectively. As a result, your tax plan is in sync with your long-term goals and current financial condition. An alternative would be to compare tax preparation software to determine your yearly tax obligations. A greater understanding of how to handle your money will result from this.

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