You’ll either have a windfall of cash to pay down debt, or learn you owe more

Tax season 2018 may feel like a major pain in the neck. But, one thing this annual American feast of financial self-loathing does accomplish – besides putting lots of wasted money into the coffers of tax preparation firms – is to force us to stop and take stock of our financial realities.

For people focusing on paying down their debts, this can be a prime opportunity to free up some extra cash all year-round in order to speed up the process. So let’s review what you can learn from your federal Form 1040.

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First question: Did you owe taxes? It’s a truly uncomfortable and disturbing experience to add up your taxes and find yourself owing a significant amount of money to Uncle Sam. In the worst case, it means adding to your debt by either financing your tax bill on a credit card or other loan. Or, you can set up a repayment plan with the Internal Revenue Service.

If that’s your case, your first step is to incorporate your new tax debt into your debt repayment plans. The next step is to make sure it doesn’t happen again next year. Fortunately, the solution is simple.

Head over to the IRS website at, search for “withholding calculator,” and you can project exactly what you’ll owe during tax season 2018.

You’ll need the most recent paycheck stub for everyone on your return, and the tax return you completed the year prior to guiding you in estimating your deductions and credits. The final result even instructs you about how to fill out your Form W-4 for withholding. Take that to your human resources department or fill out the form on your company payroll site, and you can avoid owing a big tax bill next year.

Use your refund to pay down debt

If you had the happier outcome of getting a tax refund, then calculating your withholding can help you find more cash to accelerate your debt payoff. Follow the same steps, adjust your W-4 and you’ll end up with a bigger paycheck. That’s money that can go right toward getting debt-free now instead of waiting for a big refund check next April.

There’s just one catch, though. You have to make sure that extra cash doesn’t get sucked up into your regular household spending, which is easy to do.

Instead, examine your next paycheck after your adjusted withholding kicks in, do a little simple math to figure out your increase, and direct that amount to your debt by either increasing the amount of your automated debt payments (the easy way), or setting that money aside in a separate account so it’s available for debt payments.

One additional word of caution: If you don’t have an emergency fund equal to at least two paychecks, you should use any extra cash flow (and a large chunk on any refund you’ve got coming) to bolster your rainy day fund. A big part of getting out of debt is making sure you don’t add to your balances, and even a modest emergency fund means you can handle a problem with cash instead of putting it on plastic.

Time is running out. Not sure which software to use to get your taxes filed before the deadline? Check out our article How to choose the best tax software for YOU.  


Brian J. O’Connor is the author of the award-winning budget book, “The $1,000 Challenge: 
How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”


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Meet the Author

Brian O'Connor

Brian O'Connor


Brian O'Connor is a contributing writer for O'Connor is a journalist, writer and consultant. He's a syndicated personal finance columnist and author of "The $1,000 Challenge."

tax debt, tax refund

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Article last modified on April 17, 2018 Published by, LLC .