Debt management is a method for efficiently controlling your spending habits. Also it involves some technique for eliminating debts for ever so that you start all again learning from mistakes.
Usually, based on the number of your deductions your employer deducts or withholds income taxes from your paycheck. The deductions reflect an estimate of what you'll owe - but most people end up either paying something more to the IRS or getting a tax refund with money back.
You may have income not subject to withholding, such as dividends, interest, income from side businesses, gambling winnings, stock gains, tips, money paid to you as an independent contractor, forgiven debts, small-business income, hobby income, rents, and gifts above a certain dollar level.
Be sure that you prepare yourself for that inevitability because you haven't paid out taxes from these streams of income.
As you do your planning, you can select one of three approaches to what is called general tax planning: Underpay, overpay, or strive to pay just the right amount.
Underpaying Your Withholdings
If you don't have a plan for your spending and savings, you may convince yourself that under-withholding your taxes provides the equivalent of an interest free loan from the IRS. You tell yourself you'll figure out the tax issue when it comes up, which is actually long time from now.
Besides, you have pressing requirements for the money, and they have to be taken care of instantly. The backup plan: If you owe money April 15, you can always pay it with your credit card, right?
If you underpay your withholdings and owe a big tax bill in April, you'll find that your credit cards will be absorbing more unplanned items than just taxes, and they might well be full already.
A further caution about taxes of all kinds, is that under current bankruptcy rules, local, state, and federal taxes cannot be discharged in a bankruptcy, nor can credit card debt incurred from paying your taxes.
Overpaying Your Withholdings
Many people say that they intentionally overpay their taxes as a budgeting strategy: "I use my refund to pay down my cards after holiday shopping" or "I don't want to owe any money."
For efficient debt management, make a budget so that you beforehand know where you stand financially. You can even take help of experts in making budget so that you do not deprive your self of necessary spending. Once you have finalized the budget, stick to it for long term results.
The problem with overpaying is that, at a minimum, you're giving the government an interest-free loan of your money - money that you could be using to pay down debt, build up savings, or achieve any of a zillion good purposes.
If you've overpaid all year and an emergency comes along in November, you can't ask the government for an advance of your refund to cover it. But you could utilize that money if you had it in a savings account, or even in a cookie jar.
Talk to a qualified tax preparer and go over your situation if you're constantly getting a refund check every spring. You'll likely be able to find a way to cover your taxes, without overpaying along the way.
Paying the Right Amount of Withholdings
Adjusting your withholdings so they mix absolutely with what you'll owe at the end of the year is not as not as tough as it may look in the first sight. At least consult with a tax preparer to get a good forecast of your tax commitments for the year.
You may get an early budget bonus if you find you're over-withholding and can increase your deductions - which may allow you to fund some of those short-term goals you've been saving for.
On the other hand, if there is some shortfall in your future, you're much better knowing about it in advance so you can do something before it shows up on your doorstep.
Oftentimes, may people plan poorly and dig themselves into a hole come tax time, some even choose to attempt to evade paying their taxes. Those who are interested in helping people in these situations should consider a Masters in taxation degree.
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