Tax Refund or IOU, IRS? Tips for Managing Either

by | Mar 4, 2020 | Building Wealth, Tax Planning

tax refund or postpone

Tax season is upon us.

Hopefully, you paid attention to my previous blog about getting prepared, and have all of your tax-related documents ready for the big tax appointment day.

Don’t put it off! Even if you think you will owe money, it’s better to find it out sooner rather than later so you can begin planning for how to pay it. Bad news does not improve with age.

If you anticipate a refund, get started putting that money to work for you!

Here are some tips for how to manage either scenario.

Let’s say you owe. Maybe you cashed out stock options and the company didn’t withhold enough taxes. Or you exercised ISOs and didn’t realize the impact that the AMT (Alternative Minimum Tax) would have on your return. So now you owe.

The good news is that you’ve had the use of this money throughout the year, not Uncle Sam. The bad news is you have to figure out how to cover what you owe.

So how do you come up with the cash?

Here are some options:

  • Cash out more stock options (be sure that you have the right amount of tax withheld)
  • Sell positions in your portfolio looking to offset gains and losses, if possible
  • Ask for a loan from your family
  • Pull out money from your emergency savings account (only if you have no other option)

 

If none of those options work, you can set up a payment plan with the IRS. You can apply for either a short-term (120 days or less) or long-term (more than 120 days) plan. There’s no fee to set up a short-term plan, but there is a fee to set up a long-term plan. Both plans include accrued penalties and interest until the balance is paid in full.

Now let’s talk about what to do if you receive a refund. Yes, it’s tempting to blow it on something you’ve been wanting to buy or do. But take a deep breath and consider the following:

  • Pay your property taxes
  • Open a Roth IRA, whether it’s a backdoor Roth or spousal Roth
  • Invest in your company’s Mega Roth conversion program, if you are lucky enough to have that option

Whatever you do, do not spend it ALL. Take a portion and save it, and then go ahead and take that vacation or redo your closets but promise you will save a portion!