Building Financial Stability While Resolving Tax Debt

Once you begin resolving your tax debt, it is important that you focus on building your financial stability in order to avoid it happening again. The last thing you want is to end up in the same situation a couple years down the road. Luckily, there are a few key things you can do to secure your financial stability. All it takes is some discipline, patience, and strategic planning.

Take Stock of Your Current Financial Situation

First, you need a clear picture of your current financial situation. This means really digging in and reviewing all income, expenses, savings, and outstanding debts. Make sure nothing is left out. In order to plan for financial stability, you’ll need the full picture. You’ll also want to understand how resolving your tax debt is affecting your financial situation. If you paid it off in a lump sum, your savings have probably taken a major hit. If you’re on a payment plan, then that is an added expense every month. If your wages are being garnished, then your income has effectively decreased.

Create a Realistic Budget

Now that you have a complete understanding of your financial situation, you can use that information to create a realistic budget. Always start your budget with necessary expenses. These are things you and your family need to survive, such as mortgage or rent payments, food, household essentials, and clothing. You should then include any debt payments. This should include any tax debt payments if you have them, as well as any other debts, such as car or credit card payments. Once all necessities are included in the budget, you can include some discretionary spending for entertainment if your income allows.

Remember, you don’t want your budget to use every cent you earn. True financial stability requires savings. If you’re not sure where to start, you can use the budget worksheet from the Federal Trade Commission. This is a guide that helps you easily build a realistic budget.

Rebuild Your Emergency Fund

Once you have your budget and are sticking to it, it’s time to rebuild your emergency fund. Everyone needs an emergency fund. Without one, losing your job, medical bills, or some other unexpected expense can completely ruin you financially. Think of an emergency fund as a safety net that could one day save you from financial ruin. The Consumer Financial Protection Bureau provides useful tips on how to build up this fund.

It can be tough to know what number to aim for when building an emergency fund. A good rule of thumb is that it should be 3-6 months of essential living expenses. This will give you a good amount of runway should something unexpected happen. The budget you created should have all of the information you need to calculate how big your emergency fund should be.

Stay Current on Tax Obligations

If you do not stay current on your tax obligations, you will find yourself back in the same exact situation of financial instability. Make a point of filing your taxes on time every year. You should also ensure that the right amount is being withheld from your paycheck to pay your taxes. If you are self-employed, consult with an accountant regarding how much you should be putting away to cover your taxes. Whatever it takes, just ensure that your taxes are always filed and paid on time going forward.

Research Other Resolution Options

Some tax debt resolution options can make it incredibly difficult to rebuild your financial stability. This is especially true of wage garnishment. Having your wages garnished makes it extremely difficult to build up your emergency fund or savings. However, you are not out of options. You can hire a professional resolution company to help stop wage garnishment. They will communicate directly with the IRS on your behalf to request an immediate stop to establish an alternative payment framework or prove financial hardship, which is required to get the IRS to lift a wage garnishment.

Have a Long-Term Financial Goal

Finally, make sure you have a long term financial goal. It can be hard to stick to your budget and put money away if it doesn’t feel like you're working towards something. This goal will be different for everybody. It could be buying a house, hitting a certain amount in your savings account, or something else. As long as you have a goal, you can keep your head down and continue working towards your financial stability.