Many things you do can change the taxes you will owe. And if you’re not careful, you can get hit with an unexpected tax bill and maybe not enough money to pay it! It happens to people all the time. Here are a few common actions that can trigger unexpected taxes that you should plan for:
- You withdraw money from a regular(not Roth) IRA or 401(k) – If you are over 59-1/2, you will owe income taxes on the withdrawal from your IRA or 401(k). If you are under 59-1/2, you will pay income taxes on the withdrawal PLUS a 10% penalty. You may avoid the penalty in limited cases, but the withdrawal is still income and will be taxed. Have taxes withheld at the time of the withdrawal to be safe and avoid a large tax payment later.
- You make more money than you did last year – If you don’t adjust what’s withheld from your paychecks, you may owe more than you expect. If you did side jobs and didn’t have taxes withheld, well, you’ll owe taxes on that income, too. Plan ahead!
- Your tax situation changed – You got married, divorced, widowed, kids grew up, etc. Make sure you adjust your withholdings! Your taxes may go up or down, but they likely will change either way.
- You sell some stocks – If those stocks you’re selling have gone up in value since you bought them, you will owe taxes on the increase in value. Your brokerage or mutual fund company can tell you how much you will pay taxes on, but not the amount of the taxes. If you use an online platform, make sure it tracks all purchases and sales carefully!
- You use cryptocurrencies – The IRS treats crypto as an asset, not money, so if you sell it (including if you use it to buy something), you will be taxed. If you buy and sell crypto, see what the platform you use says about tax tracking.