The vast majority of tax filers get refunds — 83 percent, according to the IRS. But for the other 17 percent, tax season brings a nasty surprise: a tax bill. I found myself in that situation last year when I realized my husband and I owed about $8,100.
It was a rude awakening, and we stressed over how we’d come up with the money by the April tax deadline. We did pay it all off, but not without learning a few lessons first. Here’s what I figured out along the way.
How I racked up an $8,100 tax bill
So how did I even end up owing so much in taxes? My husband had gotten paid for a pretty big freelance job at the beginning of 2015, and I calculated we would owe around $2,000 in taxes on that income.
What I didn’t account for, however, was my own income change. I switched from working part-time to full-time at a higher rate of pay at the start of 2015.
That meant our household had two full-time income earners — but you wouldn’t know it from looking at our tax withholdings. My husband and I didn’t coordinate our W-4s and we both claimed too many allowances.
We both put ourselves down as the head of household, and both claimed our child as a dependent. But we should have had only one spouse claim head of household status, and only one parent claim our daughter as a dependent for a W-4.
We also failed to consider that the additional income from my full-time job would be taxed at a higher rate. We underpaid taxes throughout 2015 by about $500 a month. Adding in the freelance bill, our tax preparation software put the amount we owed at $8,100. Yikes.
Smart move #1: filing for a tax extension
Owing $8,100 was hard to wrap my head around. Even for me, someone who typically sees the value in paying taxes and contributing to society in that way, it sucked.
I tried hard not to be resentful of this massive tax bill. After all, we couldn’t owe taxes on money we didn’t earn; I reminded myself that the taxes owed just reflected that we’d had a great year.
The truth was, the fact that I owed taxes was no one’s fault but my own. My husband and I had failed to discuss our new financial situation and consider how it would affect our taxes. It was one of those hard moments when I had to own up to a financial mistake and deal with the consequences, even though they hurt.
Because we owed so much, we weren’t in a hurry to file our tax return. One of the first things we did when we realized owed so much was file an extension for our 2015 tax return. That gave us another six months to review our returns to see if we could find a way to reduce our tax bill.
Smart move #2: saving a robust emergency fund
We knew that no matter what, the deadline to pay our taxes wasn’t going to budge. That’s because a tax extension only delays your deadline to file your paperwork — you must still pay your estimated taxes by the April deadline.
The timing for this huge tax bill was pretty awful. I was nine months pregnant with our second child and due any day. The fact that we had a new baby coming only added to the stress.
But in some ways, the timing worked in our favor. With a baby on the way, we had made serious efforts to save in previous months. I knew from experience we’d need that cash to cover medical bills and compensate for the pay we’d miss out on while I was on maternity leave.
We certainly hadn’t saved that money to give it all to the IRS, but the fact remained that about $8,000 of our savings was only there because we’d been underpaying our taxes. We bit the bullet and sent a check with the amount we owed on April 18, the tax deadline for that year.
And just in time, too — the same day, I was admitted to the hospital to deliver our baby. He was born the next day.
Smart move #3: getting professional tax help
After we sent in what we owed, we were able to focus on our baby and the adjustment to being a family of four. Thankfully, our taxes weren’t hanging over our heads in those difficult first few weeks. Because of our tax extension, we could take our time figuring out our next steps.
My husband, Chris, took our taxes to a professional tax preparer during his paternity leave in August. The tax advisor asked some questions, and walked him through our situation.
“Honestly, the questions she asked were similar to what TurboTax had asked,” he recalls. “But she brought an added level of human expertise that I couldn’t get with the software.”
After crunching all the numbers and going through the possible deductions, the tax advisor had found just under $1,000 worth of additional savings. “She showed me a bunch of deductions and write-offs that I hadn’t realized I qualified for,” Chris says.
Even with the tax advisor’s hefty fee of $477, we still came out $500 ahead on our tax return. Plus, the tax preparer assumed responsibility for the accuracy of the return. We can rest easy knowing that if the IRS were to audit it, she would be liable for any discrepancies — not us.
For me, the entire experience underlined how important it is to live within your means and put a little aside every month. That way, you can be prepared for anything life — or the IRS — throws your way.