Too large a refund or a balance due might mean the need to look at what is coming out of your paycheck. Besides taking out from your paycheck for Social Security and Medicare, they also withhold for your federal and state taxes based on the W-4 you completed. The income tax withholding is sent in to the IRS and held in you name until a tax return is filed. It’s then used to pay the tax liability on your return. If there wasn’t enough pre-paid, you have a balance due to pay with the return. Otherwise, you get a refund of the extra withholding as a refund.
Withholding is based on that particular income source; paycheck, IRA distribution or other income. If all you have is one wage income, you shouldn’t have much of a balance due unless your W-4 is not filled out correctly. More than one job, investment income, Social Security, pension or a side business and you can find that you will owe on April 15th even if that income had tax withheld. Yes, you can owe even if everything had withholding. This is an issue for two income families when their W-4s aren’t filled out correctly.
I also see it a lot with clients who take out from their 401(k) or an IRA. They hand me their 1099R and ask if it has to go on the return since they’ve already paid the tax on it. (I’ve never had someone ask if a W-2 has to go on the return because it has withholding.) I tell them yes they have to include it. Later I have to tell many of them why they owe Uncle Sam is because there wasn’t enough withholding taken out of that distribution.
Generally, the withholding on non-wage income is a set percentage. You might be able to override the percent with the payer when everything is set up. Social Security has three percentage rates to choose from. When you retire, you might get a W-4P to fill out for your pension withholding. Most of the time, if they withhold at all, the payer automatically takes out a percentage and sends it to your withholding account with the IRS.
The problem is that no income is taxed alone. It’s added to the rest of your income and taxed that way. Joan and Mark both withdraw $10,000 from their 401(k) and find that 25% ($2,500) has been sent for them to the IRS. 10% will cover the early withdrawal penalty and the remaining 15% will go toward the tax on the distribution itself. For Joan that’s not a problem. She earns $25,000 a year and her W-4 is set up to give her a small refund. Her marginal tax rate is 15%. The additional $10,000 from her 401(k) will all be in the 15% rate or $1,500. The 25% withholding works for her and covers the tax and penalty for early distribution. But Mark makes $60,000 a year and has a marginal rate of 25%. That means the extra $10,000 distribution will be taxed at 25% or cost him $2,500 in taxes plus the $1,000 penalty for $3,500 in tax on the distribution. He’ll owe $1,000 because the 401(k) withholding doesn’t cover the tax on that income.
That’s why good tax planning looks at all your income, deductions and credits. Look at the income you expect to have in 2015 and any life changes that you know will happen. Are you getting married or divorced? Will there be a new baby or will a child move out on her own? Do you now qualify for a deduction or credit or will you lose them? With that information, you or your tax pro can estimate your 2015 tax liability and see if you will have enough withholding to cover the expected tax.
The easiest way is to increase what is prepaid into your IRS account is to change your withholding. This way, you don’t see the money to spend it first or forget to make the estimates. Your tax pro can crunch some numbers and give you some suggested changes. If you are doing this yourself there are W-4 calculators all over the place. The IRS has on online calculator and there are apps for tablets and phone. The key is to take into consideration all of the income you expect to have in 2015 when you estimate your tax liability and what you need to cover it. If you must have a larger refund, add that amount to the tax for the total you need to withhold.
Once you know what you need, you then have to change your W-4 at work. And you must monitor your pay stub until you see the new amount coming out of your check. If your withholding doesn’t change, you might want to check with your Human Resources or payroll person to find out why.
If you don’t want to mess with changing your W-4, you can make estimate payments to the IRS. Pre-paid directly. This is especially helpful for taxpayers who don’t have withholding to tap into. Those who are self-employed and some retirees come to mind.
Will a little tax planning and changing your W-4s mean that you won’t owe on April 15, 2016? There are no guarantees. This is an estimate. Also, any withholding changes you make won’t be for the whole year but it will be better than if nothing was changes. If you didn’t like the results this year and/or you know there will be changes for 2015, a little tax planning and W-4 adjustments might be in order.
The most dreaded words in modern society - the computer is down.
Mine is down, again. I guess it wants a vacation because it keeps turning itself off. It had done this during tax season but my helpful tech guy was able to change out the fan and get me through the rest on the season. But on Friday, it quit and wouldn't stay on. I thought being off all weekend would give me some work time this morning. No such luck. It stayed on long enough to let me run a backup to MozyPro then it died.
Not a good time for this to be happening. However, at least it's better than the first week in April. I do have some returns to work on including a Form 990 for a tax-exempt organization. With luck, my system will be back up in a couple of days and I can catch up quickly.
With a couple of iPads and my Mac, I'm not total without computer power. I just can't do tax returns.
This downtime has made me rethink the whole cloud thing. There is talk that Drake Software (my tax software) would be offering an option where the software would be in the cloud and I would prepare taxes from there. I had been against it for me. My internet has been too problematic since I had to switch to Uverse. The last thing I wanted was losing my connection in the middle of preparing a return with the client sitting at the desk.
But if I could have both worlds, software on my computer that regularly syncs with my account in the cloud I might consider it. The way iCloud Drive sync my Mac, iPhone and iPads. That way I wouldn't have to tell a client that I would be happy to help her with the simple form the state sent her but would she please bring in her copy of the return because I can't access mine and I need the numbers off it.
In a few days, my system will be back and I can catch up. And I'll have a better computer since we are going to take the down time to give it a check up and expand the memory. In the meantime, I'll have to make due with writing blog posts on a iPad and catching up on my reading.
P.S. Posting to the blog from the iPad is not a good solution.
Yesterday (April 15th) was a manic depressive kind of day. It would be calm for a while then everyone would call or come by at the same time. (There were the three last minute changes to completed returns in 10 minutes.) Add to that U-Verse was intermittent for the second day. I had to time return transmissions to the two little green lights on the modem.
Now it’s time for my after tax season catch-up. I need to straighten up my desk and do some filing. I have a pile of tax reading to catch up. And that means I’ll find a bunch of topics to write about. I also need to decide on CPEs to keep me busy and work on between some 990s and extended 1040s. But not today.
Today, I’m taking it easy. I may work on a very easy return that came in late yesterday or I might start a tax novel I want to read. Or, I could veg out and not do anything tax related. It’s nice to have that option occasionally.
I know you want to close out your tax filing adventure but make sure all your loose ends are tied off you don't have a tax crisis later.
Yes, I know that Wednesday is April 15th. I’ve actually had that figured out for quite a while now. Where have you been? It’s been all over the newspapers, TV and radio.
I’m soooo happy that you stopped by to shoot the breeze and ask about getting you paperwork to me. All I’m doing is working on other tax returns and I haven’t been interrupted for all of 15 minutes. I am overjoyed that you think you can get me most of your paperwork Tuesday afternoon. I will be thrilled to look at what you bring in and give you an estimate of what to send in with the extension I will be filing for you.
I understand you are a little disappointed that I won’t have your return ready to file on the 15th. But I have many other returns to finish besides yours.
I know the myths but most tax pros do not load up on caffeine and stop sleeping in the days leading to April 15th in order to get all their returns done by April 15th. Believe me you don’t want me working on your return when I’ve been going without sleep.
No, I don’t take appointments on April 14th or 15th. My first available appointment is Monday. I will be happy to take the return if you just want to drop it off but I need those two days to finish the returns I can, answer questions, re-print lost vouchers, give completed returns to clients and e-file their returns.
It’s nice that you found me on the internet and have e-mailed me with a few tax questions. I will give them my full attention on Thursday.
I’m sorry you didn’t return this year but I understand all your friends are telling you that it’s stupid to pay someone to prepare your return for you. No, I really know nothing about Turbo Tax. I would suggest calling their support line.
Had a client present me with a balance sheet for his business recently that had a negative balance on all the business bank accounts. Since he didn’t handle the books he checked into it for me. The answer he got from the family member doing the books was that was the way “accounting program” handled it. I wasn’t to worry. There was money in the bank. They’ve never been overdrawn.
No, sorry but that is not the way the program will handle it unless someone puts it in wrong. It’s a classic example of GIGO.
GIGO is an old computer term; garbage in, garbage out. Basically, if you put in bad info into the computer you can’t expect to get accurate results out. It doesn’t matter how good the program is it needs correct information to operate properly. GIGO applies to taxes and bookkeeping programs too.
Tax software and bookkeeping programs can be a great help. But they can also let you do things you shouldn’t. This is especially true with tax software since so much of tax preparation is based on judgement calls. Is it a business or a hobby? Can you claim your deadbeat brother? Do you qualify for that credit or deduction? If you don’t answer the software’s questions properly, you might lose the credit. Or, the software may let you have the credit when you don’t qualify.
It’s up to you know why the software spits out a form. It’s not hard; the IRS has lots of information on their website to help you. If you’re going to use an accounting program, take the time to understand the basics of bookkeeping. And with either program, read the messages and notes the program gives you. Just because you can override the system doesn’t mean you should. GIGO.
The PTC is part of Affordable Care Act which pays part of the health insurance premium for qualified taxpayers. They sign up through one of the Health Insurance Marketplaces (HIM) and are given a credit against their premium based on their income. When they file their 2014 tax return, they use the Form 1095-A (Health Insurance Marketplace Statement) they received to reconcile the advance credit to which they actually were entitled.
The IRS has begun sending out letters to taxpayers who claimed the PTC on their returns asking for more information or a copy of their 1095-A. According to the IRS website (near the bottom):
In some situations, before we can send your refund, the IRS may send you a letter asking you to clarify or verify information that you entered on your income tax return. The letter may ask for a copy of your Form 1095-A.
If you get a letter, don’t panic but do send in the information the IRS is requesting.
The IRS has a lot of penalties. In fact, they have a handbook dedicated to penalties. Luckily, most taxpayers won’t face most of them. There are two that the average taxpayer can find added to their balance due and I get asked about them a lot this time of the year. Clients want to know about the penalties they will face if they don’t file their return or can’t pay their tax. And, of course, they also want to know about the interest the IRS will charge.
First, it’s important to understand that these penalties and interest are based on what you owe. If you have tax refund, then your return can be late and you don’t get penalized. You’ll just lose the refund if you wait too long to file the return.
Failure to File – This is a killer of a penalty. It is 5% a month or part of month until you reach a maximum of 25%. There is also a minimum penalty of $135 or 100% of the tax if you’re over 60 days late filing your return. That is just for not filing the return on time.
Failure to Pay – When you don’t pay your balance due you trigger this penalty. It’s a half of 1% a month up to a maximum of 25%. If you are also accruing the failure to file penalty, the maximum rate between the two is 5% a month. Also the half percent goes to 1% if you don’t pay your balance due within 10 days of receiving a notice to levy.
If you file an extension, you are still expected to estimate your balance due and pay that by April 15th . If you don’t pay at least 90% of the tax, you can be hit with the failure to pay penalty.
Interest – As if the penalties aren’t bad enough, the IRS will also add interest to your debt. The basic rate is the current federal short term rate plus 3%. It changes quarterly and for April 2015 3.48% (0.48% plus 3%). Interest is compounded daily. And yes, interest is charged on the penalties and interest and added to your balance due.
How does it work? Let’s say you owed $1,500 on your 2013 tax return. It was due April of 2014 and you didn’t file the return until October 15, 2015. How much will you owe after 18 months? According to the program I use to calculate interest and penalties, TaxInterest, you will owe $1,989.42 (You didn’t think I would do this by hand? No way) The breakdown is:
The IRS will abate (reduce or drop) the penalties for just cause. When you receive a notice, send in a letter explaining the circumstances. There are also times, such as natural disasters, when they will give a blanket reprieve to taxpayers in that area. If you don’t pay all your tax, interest and penalties at one time, the IRS applies your payments to the tax first and the interest and penalties continue to grow.
States all have their own interest and penalties on income taxes not paid on time. In Kansas, the interest is 4% a month. We only have one penalty which is 1% a month to a maximum of 24%.
It’s to your advantage to get your income tax paid as soon as possible. It might be financially advantageous to get a loan when you fact in the penalties. Even if you can’t pay the tax, get the return filed and stop the failure to file penalty. If you look at the example, that penalty was twice the combined interests and failure to pay penalty for 18 months.
April Fools Days means that there are two weeks and counting until your 2014 income tax returns are due. So, here are a few tips and reminders to make everyone’s tax life easier the next two weeks …and beyond.
Bottom line...stop procrastinating and get your taxes done.