Category Archives: income tax deadline

10 Million Taxpayers Face an Estimated Tax Penalty Each Year; Act Now to Reduce or Avoid it for 2017

The IRS has seen an increasing number of taxpayer’s subject to estimated tax penalties, which apply when someone underpays their taxes. The number of people who paid this penalty jumped from 7.2 million in 2010 to 10 million in 2015, an increase of nearly 40 percent. The penalty amount varies, but can be several hundred dollars.

The IRS urges taxpayers to check into their options to avoid these penalties. Adjusting withholding on their paychecks or the amount of their estimated tax payments can help prevent penalties. This is especially important for people in the sharing economy, those with more than one job and those with major changes in their life, like a recent marriage or a new child.

There are some simple tips to help taxpayers:

Having enough tax withheld or making quarterly estimated tax payments during the year can help you avoid problems at tax time.

Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.

There are two ways to pay tax:

Withholding from your pay, your pension or certain government payments, such as Social Security.

Making quarterly estimated tax payments during the year.

This will help you avoid a surprise tax bill when you file your return. You can also avoid interest or the Estimated Tax Penalty for paying too little tax during the year. Ordinarily, you can avoid this penalty by paying at least 90 percent of your tax during the year.

Why you should change your withholding or make estimated tax payments:

If you want to avoid a large tax bill, you may need to change your withholding. Changes in your life, such as marriage, divorce, working a second job, running a side business or receiving any other income without withholding can affect the amount of tax you owe. And if you work as an employee, you don’t have to make estimated tax payments if you have more tax withheld from your paycheck. This may be a convenient option if you also have a side job or a part-time business.

Some income is not subject to withholding. This includes some income from self-employment, the sharing economy or some rental activities. Be sure to make estimated tax payments on those sources of income throughout the year. You may also make estimated tax payments if the withholding from your salary, pension or other income doesn’t cover your income tax for the year.

You make your estimated payments based on the income you expect to earn and any credits you expect to receive in the year. You can use your prior year tax return as a guide and Form 1040-ES, Estimated Tax for Individuals has a worksheet to help you figure your estimated payments.

You can use estimated tax payments to pay both income tax and self-employment tax (Social Security and Medicare).

Premium Tax Credit deadline to maintain 2016 eligibility approaching

IRS Health Care Tax Tip 2015-40 reminds taxpayers who received advance payments of the premium tax credit (PTC) in 2014 that they must file a 2014 individual income tax return with Form 8962 attached in order to reconcile their advance payments of the PTC with the amount of PTC they were actually entitled to. They should file as soon as possible – by July 31 if possible, in order to maintain their eligibility for timely advance payments of the PTC for 2016 health care coverage through the Health Insurance Marketplace (or Exchange). If they fail to do so, they may face a gap in advance payments of the PTC at the beginning of 2016.

Taxpayers who received advance payments of the PTC in 2015 and extensions until October 15 to file their 2014 individual income tax returns should not wait to file. They should file by July 31 in order to maintain their eligibility for advance payments of the PTC at the beginning of 2016.

For more information about the Affordable Care Act and the premium tax credit, visit IRS.gov/aca.