Avoid Penalty for Underpayment of Taxes

So, as much as we grumble and grouse about paying taxes, imagine how you would feel if you received a notice from the IRS that you were assessed a penalty for underpayment of taxes.

If we are employed as W-2 employees, taxes are routinely withheld from paychecks.  But, that only takes into consideration taxes on your wages, not on additional sources of income such as self-employed earnings or other income, such as interest, dividends, self-employment, capital gains, prizes and awards.

The IRS has launched its Paycheck Checkup campaign to encourage people to check their tax situation, including withholding and estimated tax payments.  This helps taxpayers to determine if they are having enough taxes withheld from their wages.  Some of the highlighted situations that can be affected by the new laws will impact two-income families, if the child tax credit is claimed, if there are dependents age 17 or older, if deductions were itemized in 2017, if there is a high amount of income or the return is complex and if there was a large refund or tax bill for 2017.

Our tax system is one that calculates tax on income as it is received.  For people who receive salaries, wages, pensions, unemployment compensation and the taxable part of Social Security benefits, tax can be withheld.  And, the amount of taxes withheld can be set by the taxpayers.  If taxpayers do not have sufficient taxes withheld, they can make estimated quarterly payments to avoid penalties.

Why is the IRS suggesting taxpayers look at their withholdings?  Well, The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. And, contrary to popular belief, the IRS doesn’t like to assess the penalties to innocent taxpayers.

A tool available on the IRS website – www.irs.gov – called the Withholding Calculator will help taxpayers eliminate or at least reduce any surprises in early 2019 when filing their taxes.  If you find that you have not had sufficient taxes withheld, supply your payroll department with a new Form W-4 to adjust the withholdings.  If you feel it necessary to make an estimated payment, there are guidelines on the IRS website to assist in that regard.

Don’t be surprised in early 2019.  Take action to have the comfort of knowing you have a sufficient credit for taxes paid.

 

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Kay Sowa

About the Author

Kay Sowa is a paralegal in the Trusts and Estates Group at Capehart & Scatchard, P.A. She is an IRS Enrolled Agent as well as a Certified Trust and Financial Advisor. She oversees the trust and estate administration practice for the firm. She is an accomplished author and lecturer who has frequently spoken on behalf of a number of organizations including the National Business Institute and the Institute of Paralegal Education.

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