5 Ways Income Taxes Can Help You Get Debt-Free

Do you want to get out of debt and stay out of debt? No matter what type of debt plagues you, your income taxes can help with your journey to a debt-free life? If you're not sure how, here are a few of the most important ways. 

1. Tax Refunds

For many Americans, income tax season results in a tax refund. Those refunds could be used to pay down or off a debt, shore up an emergency fund, or prepay expenses that you normally would have put on a credit card. So, be sure you file your taxes every year and plan in advance what to do with that valuable refund. 

2. Avoiding Debt Cancellation Penalties

If you do get any of your debt forgiven or cancelled, that amount may become taxable income. To avoid this, you can claim one of several exemptions to the debt cancellation penalty. One is to use bankruptcy for discharge. Another is to calculate that you were insolvent at the time. While these take time, they avoid letting a tax bill throw you off. 

3. Withholding Strategies

The amount of money taken from your paycheck (or sent as estimated payments) is up to you. If you get a big refund generated by overpaying during the year, you might use this to pay off debt. Or you could reduce the funds withheld each payday and use the extra room in your budget to pay off debt or shore up your finances. 

4. Advance Tax Credits

Advance tax credits are credits that are paid out throughout the year rather than claimed only once on April 15. Taxpayers can currently claim advance payments for the Child Tax Credit and health insurance. Because child-related and medical expenses are among the biggest sources of debt, advance payments can help you avoid debt. And the Child Tax Credit money can be used for debt payoff each month. 

5. Budgeting and Planning

Preparing your income taxes can be a time for every taxpayer to sit down and think about their finances. As you gather all your information together, you may realize that you're wasting money each year, that your income isn't as much as you thought it was, or that your business is or isn't really helping your finances. Use this information to start fresh next year, to plan how you can reduce future taxes, or to motivate you to take even more control of your money. 

Want to know more about how your income taxes can help or hinder your debt-free journey? Start by meeting with a tax preparation service in your state today. Together, you can create a better future starting tomorrow.