Many people have finished their tax returns already. In many cases, filers have received their refunds. But, some taxpayers have received the bad news that they’re going to have to pay taxes to the IRS or to their state or local tax agency. This is because they didn’t pay enough to cover their required tax amount during the year. Learn what you need to do if you discover you owe on your taxes.
If this applies to you – or if you haven’t yet completed your return because you’re afraid you might owe – here is some useful advice to keep in mind.
Why might you owe money at tax time?
For the 2018 tax year specifically, many filers may be surprised at what they owe because of the Tax Cuts and Jobs Act, which went into effect that year. This act was designed to give workers more take-home pay by reducing the amount of tax withholding taken out of each paycheck. For filers who were not paying in a lot above what they owed already, this means additional taxes may be due.
Other situations that can lead to owing additional taxes include changes in filing status, such as no longer being able to claim a dependent when an adult child gets too old, earning income from freelance or contract work on which you have not paid estimated taxes, or not being able to take deductions that might have been available in the past.
What to do this year when you owe money on taxes
Most importantly, even if you will have tax payments due, you must still file your return by April 15. Failure to do so will result in a penalty equal to 5 percent of the unpaid balance per month – capping out at 25 percent of the amount due.
You can submit a request for a six-month extension in filing using IRS Form 4868; however, you will still owe interest and penalties if you do not make your payment by the April deadline.
If you owe more than you can pay at one time, the IRS does offer monthly installment payment agreements, generally for a term of 72 months, which can be requested using Form 9465.
There is a cost to apply for these payment agreements, and while you will still owe interest, the penalty is reduced to 0.25% per month.
What to do to avoid owing money on taxes in the future
For those working a job that withholds taxes, you may wish to file an updated W-4 withholding form.
The IRS withholding calculator can help you determine how many exemptions to claim. Having the right number will help ensure that you aren’t paying in at filing time.
Some individuals may choose to withhold more than the calculator suggests, by choosing not to claim exemptions to which they are entitled. This may result in a lower likelihood of taxes due in April 2020, though it may also provide the federal goverment with an interest-free loan. Each filer will need to weigh these options based on their personal situation.
There’s still time to get help with this year’s taxes. Call or email now to secure your appointment.