If you paid a tax penalty last year, now’s the time to reduce or avoid it for 2017
Posted on November 15, 2017
Each year, some 10 million taxpayers are assessed an estimated tax penalty, and that number is growing. By law, the estimated tax penalty applies when taxpayers pay too little of their total tax during the year. Taxpayers are assessed a penalty calculated on the interest rate charged by the IRS on unpaid tax.
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. So if you haven’t adjusted yours yet, Teipen, Selanders, Poynter & Ayres CPAs advise, there is still time.
How to avoid paying a penalty
For most taxpayers, avoiding the penalty is simple. Just be sure that at least 90 percent of your total tax liability is paid in during the year, either through income tax withholding or by making quarterly estimated tax payments.
Taxpayers may want to consider increasing their tax withholding through 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 IRS Form W-4 and giving it to their employer. Recipients of pensions and annuities can also make this change now by filling out Form W-4P and giving it to their payer.
The easiest way to increase withholding is by claiming fewer allowances on your withholding form. Since it’s late in the year, you can also ask employers or payers to withhold an additional flat dollar amount for your remaining pay periods. For help determining the right amount to withhold, check out the Withholding Calculator on IRS.gov.
Taxpayers who receive Social Security benefits, unemployment compensation and certain other government payments can also choose to have federal tax taken out by filling out Form W-4V and giving it to their payer.
What if your income is not subject to withholding? You can avoid an estimated tax penalty by making quarterly estimated tax payments to the IRS. In general, this includes investment income, self-employment income, and pass-through income on forms K-1 (from Partnerships, Sub-S Corporations and Trusts).
What if you make estimated tax payments? Estimated tax payments are due on a quarterly basis; on April 15, June 15, Sept. 15, and Jan. 15 of the following year. The estimated taxes for the fourth quarter of 2017 are due Tuesday, Jan.16, 2018. Submitting those can help reduce the potential 2017 estimated tax penalty.
For information on other payment options or for help figuring out what you owe, talk to your TSPA CPA.