What Do I Do If I Am Concerned About My Tax Burden?

It's that time of year again—tax season. You've heard the saying, "The only thing that's certain in this world are death and taxes," and with the new year comes the need to square up with the government. The truth is that for the vast majority of people taxes are complicated. Knowing how to file correctly, how much they need to pay when to use deductions or credits, and more can be confusing. Fortunately, we've created this guideline decoding the tax burden so you can go into this season with confidence.

Understanding Your Tax Burden

If you've ever tried filing your taxes on your own, you probably realized very quickly that the wordage used is like a foreign language. Understanding the basic vocabulary of taxes will make the process simpler. One of the first things you need to know is the tax burden. You can't say the government doesn't have a sense of humor; they most certainly choose names that sound rather intimidating!

What Does "Tax Burden" Mean?

According to the Collins Dictionary, tax burden is defined as "the amount of tax paid by a person, company, or country in a specified period considered as a proportion of total income in that period." In other words, your tax burden is how much money you owe the government. Tax burden, sometimes called a tax liability, can also refer to the time you spend fulfilling your tax obligation, like how long it takes to file your taxes. Understanding what a tax burden is is one thing, but where people start to struggle is connecting the dots between knowing they owe money and calculating how much that amount is. To find out how much you owe, you'll need to follow a simple equation.

How to Calculate Your Tax Liability

To calculate your tax liability, you'll simply need to deduct your total taxable income from your qualifying deductions to determine your gross tax liability. Once you know that number, subtract it from any applicable tax credits. The resulting amount is your tax liability. Of course, the more deductions and credits you have, the more complicated your filing becomes.

Common Reasons for High Tax Burdens

So, you've entered all your information into your tax forms and done all of the calculations only to find your tax burden is way more than you thought it would be. Unfortunately, countless people make this frustrating discovery every single year. While there can be numerous reasons for incurring high tax burdens, we'll discuss a few of the most common.

Changes in Income or Tax Brackets

If you've recently had a change in income, you may be the lucky recipient of a high tax burden. Often, if you get a raise and your income increases enough to send you into a new tax bracket, your financial responsibility goes up, and you pay more taxes. The reverse is true as well, with a reduced income landing you in a lower tax bracket, often reducing the amount of taxes you have to pay. It is important to note that while a higher income can result in higher taxes, the exact amount you'll pay depends on your financial situation, including your assets.

Lack of Tax-Efficient Investment Strategies

A tax-efficient investment is one that provides the maximum amount of return with the lowest amount lost to taxes. Your goal should always be to focus on tax-efficient investment strategies so you can grow your overall net worth. Unfortunately, if you don't have the right guidance, you may not be getting the most out of your investments. Knowing which type of investment to put in the right account makes all the difference. There's two main investing account options:

●      Tax-advantaged accounts like Roth IRAs, 4019(k)s, and IRAs

●      Taxable accounts like brokerage accounts

Knowing how to get the most out of your investments can reduce your tax burden and increase your personal wealth.

Missed Deductions or Credits

Deductions and credits are your best friend when filing your taxes since they help lower your bill and, in some cases, increase your refund. If you're not using all of your available credits and deductions, you're simply throwing your money away and paying the government more than you should (and who wants to do that!)

Steps to Reduce Your Tax Burden

Having a high tax burden can be devastating, especially if you haven't financially planned for it throughout the year. The good news is that there are steps you can take to lower the amount you owe, hopefully making it more manageable and affordable.

Maximize Your Tax Deductions and Credits

Whenever the government provides a way to pay less in taxes, you should most definitely take advantage of it. Deductions and credits are like little rewards for meeting certain criteria. When it comes to deductions, there are standard and itemized available, with most people choosing the standard deductions, which are broken down into categories, including:

●      Single or married filed separately

●      Married filing jointly

●      Qualifying surviving spouse

●      Head of household

There is a long list of deductible expenses, which you can find on the IRS website.

Tax credits are similar to deductions but are subtracted once your tax burden is calculated. There are numerous credits available for a wide variety of circumstances.

Take Advantage of Tax-Advantaged Accounts (401(k), IRA, HSA)

Tax-advantaged accounts are a great way to lower your tax burden while saving for the future. There are two different types - tax-deferred, where you pay taxes when you withdraw your money, and tax-exempt, which taxes your contributions but not your withdrawals. You also don't pay taxes on the interest you earn, which can equal significant savings over time.

Review Your Filing Status and Withholdings

Your filing status and withholdings play a major role in determining your tax burden, and if you don't have the correct filing status, you may be paying too much. We discussed the different filing statuses above, and you should speak to your tax advisor or accountant to ensure you're using the right one. The filing status you choose impacts how much money is withheld from your paycheck to go toward your tax bill. These withholdings are extremely important to get right. If your withholdings are insufficient to cover this amount, you'll have a balance due, but if you overpay, you can receive a tax return.

The Role of Tax Planning in Managing Your Tax Burden

Proper tax planning is crucial to protecting yourself, your investments, and your personal property from government seizure. If you don't file correctly, you could end up in a bad situation like the woman below. Here is her story.

"About 10 years ago, I found myself in an incredibly difficult situation, owing the IRS a substantial sum of money. I had always been very diligent in filing my taxes, especially being that I worked in the tax field for many years. However, due to some unexpected life changes, losing my husband to cancer being the main factor, I found myself owing more than I ever imagined. I didn't know what to do and I must admit it got messy for a bit, almost losing my home in the process. The good news is that I started working with an accountant who guided me through the process of figuring out where I went wrong and making the necessary changes. I was also able to work with the IRS and get my tax obligation to an amount I could actually afford. I was so relieved once everything was worked out and I'm more cautious than ever now to make sure I not only file my taxes correctly, but get as many deductions as I possibly can to pay as little as possible!" - Marsha B.

What is Tax Planning and Why Is It Important?

As you heard from Marsha, a large tax burden can upheave your life completely. Tax planning is one way to help you avoid a similar situation. Tax planning is when you analyze your finances to minimize your tax liabilities. When done correctly, you'll end up owing less and earning more back. Tax planning allows you to optimize your total tax liability so you keep more of your hard-earned money.

How Early Tax Preparation Can Save You Money

Tax Day is April 15th in the U.S., but you don't want to wait until the last day before you file your taxes. Early tax preparation not only lets you get any refunds sooner, but it can help you avoid and redo any mistakes on your return that may lead to receiving an audit down the line.

When to Seek Professional Help

Filing your taxes can be complicated, especially if you have multiple deductions, credits, and withholdings. Knowing when to seek professional help is key and can ensure you know the correct amount of your tax burden.

Benefits of Working with a Tax Advisor or CPA

Tax advisors and CPAs are a valuable resource, especially for more complicated returns. They know the ins and outs of the tax system and can help you minimize your tax burden by identifying any applicable or missed credits and deductions and ensuring you comply with all local and federal tax laws. They can also:

●      Assist with tax planning

●      Help you file your tax documents

●      Assist with any audits

●      Analyze the health of your retirement accounts

How to Choose the Right Tax Professional for Your Needs

Choosing the right tax professional for your needs ensures the process runs smoothly. To make sure you choose the right one, you should:

●      Have a thorough understanding of your tax needs

●      Confirm their credentials

●      Interview them

●      Utilize a professional advisor

With the right tax professional, you can enjoy a (mostly) stress-free tax season and have confidence knowing your taxes are completed correctly.

Avoiding Common Tax Mistakes

Tax mistakes can be devastating, just like Marsha found out in the example above. Ensuring your taxes are filed correctly is essential and should be a top priority.

Errors That Can Increase Your Tax Burden

There are many errors that can increase your tax burden, including:

●      Misspelling a name

●      Incorrectly adding or missing a social security number

●      Math mistakes

●      Not having a correct filing status

●      Incorrectly entering information

●      Not signing forms

Any of these mistakes can lead to penalties with the IRS.

Understanding IRS Penalties and How to Avoid Them

The IRS will penalize you for not following their instructions for tax filing. There are multiple reasons these penalties can occur, including not filing on time, not paying your taxes, incorrectly filing your return, and paying late. These penalties can range from fines to asset seizures, depending on their severity. The best way to avoid these situations is to use a qualified tax professional who can ensure your taxes are filed correctly. Using a professional is the best way to calculate an accurate tax burden and avoid any complications with the IRS.

Understanding your tax burden is an essential part of filing your taxes correctly. Using a qualified tax professional is the best way to protect yourself and avoid any issues with the IRS. AdvisorMatchup is proud to connect individuals with professional advisors with the skills necessary to safeguard their finances. Our premier services cover mortgage brokerage, accounting, and financial planning and feature the top professionals in each field. Don't risk your financial future; let AdvisorMatchup connect you with an expert you can trust today.

Managing your finances can be overwhelming, but the right accountant can make it simple. Whether you need help with tax planning, bookkeeping, or business financials, a trusted professional can provide the guidance you need. Click here to connect with a qualified accountant and take the first step toward financial clarity today.

References

1. ​​(2022, January 20). Common tax return mistakes that can cost taxpayers. IRS. https://www.irs.gov/newsroom/common-tax-return-mistakes-that-can-cost-taxpayers

2. (2024, November 27). Penalties. IRS. https://www.irs.gov/payments/penalties

3. (2024, November 12). How to check and change your tax withholdings. Usa.gov. https://www.usa.gov/check-tax-withholding#:~:text=The%20amount%20of%20tax%20withheld,used%20to%20calculate%20your%20withholding.

4. (2024, August 14). Credits and deductions for individuals. IRS. https://www.irs.gov/credits-and-deductions-for-individuals

5. (n.d.). Tax Burden. Collins Dictionary. https://www.collinsdictionary.com/us/dictionary/english/tax-burden#:~:text=(tæks%20ˈb%C9%9C%CB%90d%C9%99n%20),countries%20with%20lower%20tax%20rates.