One thing I often see is that they lower tax withholding on their paychecks by claiming more exemptions than they really have.
This is because myy clients always want to pay all of their debts, and are willing to do many things to make enough money to do this.
For example, a single person might tell their employer to claim 9 exemptions so the employer won’t withhold very much tax money from the employee’s paycheck.
This means that the employee will get a larger net paycheck every week, and they will use the extra money to pay bills.
This seems like a good idea doesn’t it?
However, this is probably one of the WORST things you can do if you are having trouble paying of your bills.
Why is trying to lower tax withholding on your paycheck a bad idea?
- Because when you lower your tax withholding, you aren’t lowering your tax bill, you are just lowering how much you pay on it every month
If you have been getting a big refund every year, then go ahead and lower it, but if not, then you are making a big mistake.
- This is because next April, you will owe ALL of the money to the IRS, and your state’s taxing authority.
In effect, you will owe less money to normal creditors, but you will owe more money to the IRS
- The IRS is the worst creditor of all, and they have legal powers and information sources that other creditors can only dream of
The IRS can do everything that ordinary creditors can, and
- Take social security
- Take future tax refunds
- Put a lien on all of your property
No other creditor can do these things, so the IRS is the worst creditor you can have.
What else can the IRS do?
The IRS will also:
- Assess lots of penalties and interest, so the balance will grow quickly
- Force your employer to start withholding the maximum amount from your paycheck every week
- Apply this money to your taxes until they are paid off
This will leave you with smaller paychecks than when you started.
What else do you need to remember?
To make matters worse, tax debts are often not dischargeable in bankruptcy.
- If you decide to pay normal creditors before paying your taxes, you may be unable to file for bankruptcy relief
If you had simply filed bankruptcy at the moment you realized that your income was not enough to pay your bills, then you would:
- Not owe the IRS
- Not face serious collection for many years
You could be using your paychecks to restart your financial life, rather than to pay interest and penalties.
In short, if you decide to stop withholding from your paycheck to pay bills, then you are not solving the problem.
You are delaying it, and trading ordinary creditors for the IRS. The IRS, unlike ordinary creditors is extremely powerful and can only be discharged in bankruptcy in certain circumstances.
If you’re thinking whether you should lower tax withholding on your paycheck, then why not Contact Us at 612.724.4357 now and tell us how we can help you.
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