In today’s current economic climate, it is incredibly difficult to avoid financial hardship. There are numerous people in this country who are strapped for cash and struggling to make ends meet and their desperate, hasty decisions can prove to be extremely costly in the long run. When times are tough, finding a way to make a quick buck becomes commonplace. Some of the methods people use to secure extra funds that can have adverse long-term affects on their finances are adjusting tax withholding amounts through their employers, underpaying quarterly tax payments and securing short-term loans (I.E. title loans, checking account loans and paycheck advances.) Most people are aware of the dangers of short-term loans, considering they have extremely high interest rates and little flexibility in regards to paying them off; however, far fewer seem to recognize the dangers involved with adjusting tax withholding amounts and/or underpaying quarterly tax payments. These two particular options bring short-term relief, but can leave an individual in a far worse situation in the long run, particularly with regard to tax debt. Let’s look at the first of these two options, the dangers involved with it and the appropriate way to handle it, if you determine that it is absolutely necessary.
The first of the two options mentioned above is adjusting tax-withholding amounts. The easiest way to understand this is as follows; the higher number of dependants you claim on your W-4, (which is the withholding form you complete and submit to your employer each year,) the lower the amount of taxes that will be withheld from your paycheck each pay period. In the short-term, you will see a financial gain, because your paychecks will be larger each pay period. In the long-term; however, this can become a major problem. When it comes time to file your yearly tax return, the less you have paid in taxes for the year, the more likely you are, to owe a balance to the IRS, or state Department of Revenue. If you have not prepared for a tax liability and are unable to resolve this in the timeframe allotted by the taxing entity, you may be subject to penalties, interest, levies, liens and other consequences. Your financial situation may become far worse then it was when you adjusted your withholding amount in the first place. With these consequences in mind, there is a very simple way to avoid any long-term disasters when it comes to tax withholding. The IRS and/or each state Department of Revenue can provide you with information that will guide you in determining what your withholding amount should be. The information they supply tells you exactly what you can withhold, based on your income, to ensure that you will not owe any taxes at the end of the year. You can use this information to adjust your taxes, so you are not underpaying. This information can also be helpful, because if you are financially burdened and need immediate cash flow, you can withhold an amount that will make your tax refund lower in the following year, but will not put you in danger of owing a balance.
Managing your tax withholding can become a beneficial financial asset, if handled properly, but a nightmare if taken advantage of. Keep that in mind, the next time you consider your options for short-term financial relief. Always remember that there is no easy way to make fast cash and if it seems easy, you better be aware of the consequences before you proceed.
Posted by JK Harris