IRS Shows How to Avoid Estimated Tax Penalties

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The IRS is reminding taxpayers that they still have time to avoid an estimated tax penalty for the 2017 tax year (IR-2017-182, 10/31/17), by directing them to a web page to help raise awareness on the matter.

The “Pay As You Go, So You Don’t Owe” page features tips and resources designed to help taxpayers, including those involved in the sharing economy, better understand the rules and avoid an unexpected penalty.

The problem is a common one. While millions of taxpayers are assessed an estimated tax penalty each year, the number has been rising recently. For instance, it jumped about 40 percent to 10 million in 2015 from 7.2 million in 2010.

What’s even more frustrating is that many affected taxpayers can easily reduce the penalty by increasing their withholding or adjusting estimated tax payments for the remainder of the year. With some astute planning, this penalty can be eliminated altogether.

Typically, this means ensuring that at least 90 percent of your total tax liability is paid during the year, either through income tax withholding or quarterly estimated tax payments, or a combination.

Alternatively, no penalty is assessed if payments equal at least 100 percent of the prior year’s tax liability or 110 percent if your adjusted gross income (AGI) exceeds $150,000.

Keep in mind that special rules apply to some groups of taxpayers, such as farmers, fishers, casualty and disaster victims, those who recently became disabled, recent retirees and those who receive income unevenly during the year.

Taxpayers may want to consider increasing their tax withholding at the end of 2017, especially if they had a large balance due when they filed their 2016 return earlier this year. Employees can do this by filling out a new Form W-4 and giving it to their employer. Similarly, recipients of pensions and annuities can make this change by filling out Form W4-P.

In either case, taxpayers may also increase their withholding by claiming fewer allowances on their withholding form. If that’s not enough, they can also ask employers or payers to withhold an additional flat dollar amount each pay period.

Taxpayers who receive Social Security benefits, unemployment compensation and certain other government payments can also choose to have federal tax withheld by filling out Form W-4V and giving it to their payer.

For taxpayers whose income is normally not subject to withholding, starting or increasing withholding is not an option. Instead, they can avoid the estimated tax penalty by making quarterly estimated tax payments to the IRS. Generally, this includes investment income — such as interest, dividends, rents, royalties and capital gains — alimony and self-employment income. Those involved in the sharing economy, like Uber drivers and AirBnB renters, may also need to make these payments.

The normal deadlines for estimated tax payments are April 15, June 15, September 15 and January 15 of the following year. The due date is moved to the next business day if it falls on a weekend or holiday. Thus, the next estimated tax payment for the fourth quarter of 2017 is due Tuesday, January 16, 2018 because Monday, January 15 is Martin Luther King Day.

About Ken Berry

Ken Berry

Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.           

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