The IRS is trying to help raise awareness about the growing number of estimated tax penalties. They have launched a new webpage “Pay as You Go, So You Don’t Owe.” Here you can find tips and resources designed to help you the taxpayer. In the past few years the number of Taxpayers who owe estimated taxes has increased dramatically. It jumped almost 40% from 2010 to 2015. Most of those affected taxpayers can easily reduce or in some cases eliminate the penalty by increasing their withholding or adjusting estimated tax payments for the rest of the year.
With a little planning, you can avoid the penalty altogether. By law, the estimated tax penalty usually applies when a taxpayer pays too little of their total tax during the year. The penalty is calculated based on the interest rate charged by the IRS on the unpaid tax.
You can avoid the penalty by ensuring at least 90% of your total tax liability is paid during the year. You can do this in one of two ways-
- By your income-tax withholding,
- By making estimated tax payments.
Keep in mind that there are a few exceptions to this rule. Some groups of taxpayers such as farmers, fishers, casualty and disaster victims, will have an exception. Even people who recently retired may be able to have an exception.
You will want to consider adjusting your withholding if you owed a large balance due at the end of last tax year. If you are an employee, fill out a Form W-4 and give it to your employer. It may take a few paychecks before you see any changes in your withholding. If you are getting a pension or annuity, then fill out a Form W-4P and give it to your payer.
Either way, taxpayers such as yourself can typically increase your withholding by claiming fewer allowances on your withholding form. If that is not enough, then you can also ask employers or payers to withhold an additional flat dollar amount each pay period. You can use this withholding calculator to help you.
If you are on social security then fill out a Form W-4V and give it to your payer. Some restrictions may apply. Please see the form and instructions for details.
For those of you, who are not subject to withholding, consider sending in estimated tax payments to the IRS. This income can be from self-employment income, interest, dividends, rents, royalties, capital gains, and alimony.
Due Dates for Estimated Tax Payments:
Jan 15 (of the following year)
Sometimes these deadlines fall on a weekend or a holiday. When this happens you will have until the next business day to make that payment.
If you have ever owed or are expecting to owe, now is the time to get everything in order so that you can make additional payments and avoid paying an estimated tax penalty. Change your withholding or make estimated payments by the next due date. Utilize the forms and tools in this post to help you have a better tax season.