If you are of the many taxpayers who owe taxes year after year and never really understand why, this article will help to uncover some potential reasons why, as well as help you to avoid this problem going forward.
- Failure to pay estimated taxes on certain income.
Estimated tax is a method used to pay income tax on income that is not subject to withholding. Income that falls under this category include, self-employment income, unemployment compensation, interest, dividends, alimony, rental income, gains from the sale of assets, prizes and awards.
If you have a job where taxes are being withheld from your salary or wages earned, it may still not be enough to cover the additional income you may earn. Therefore, if you are self-employed, have rental income, or anticipate the sale of any assets, you will definitely want to work with your CPA to determine what your income will be from these sources and estimate if you will need to pay any estimated taxes throughout the year.
Those who have unemployment compensation should generally opt to have the federal and state income taxes withheld from their payments to help reduce any potential tax liability.
AEMC provides mid and pre-yearend tax planning to help taxpayers get ahead of any significant tax issues that could result if these situations are not dealt with before the end of the tax year, or by December 31st for most taxpayers. Proper tax planning helps to avoid underpayment of tax penalties that could be assessed and interest penalties.
- Being unaware of new tax laws that may impact you and failure to plan for them.
Taxpayers who fall within the various income brackets will be affected or not affected by certain tax laws that exist. One common fairly new tax law that has affected a number of middle class wage earners is the Additional Hospital Insurance Tax. This is an additional .9% tax on wages received in excess of various thresholds - $200K for unmarried individuals, $250K for married filing joint filers and $125K for married filing separate filers.
Since this tax is on the combined wages of the employee and an employee spouse, in the case of a married filing joint return, it is difficult to have it withheld throughout the year if an employee’s individual wages will be under the threshold, and only exceeds the threshold once it is added to their spouse’s income at the time of filing their return. If this will be the case for you, you will want to make sure you pay estimated taxes to cover this additional tax. If a single employee’s wages are over the specified threshold mentioned above, this tax is required to be withheld by your employer throughout the year and there will be no need to pay estimated taxes for the purpose of covering this tax liability.
- Claiming too many exemptions throughout the year.
Many times taxpayers owe taxes because there has been an underpayment of income taxes paid in throughout the year due to incorrectly filling out their Form W-4. When filling out the W-4 form you should take into consideration what your filing status will be at yearend and the number of dependents and itemized deductions, if applicable, that you will actually be claiming on your return when you file at the end of the year. If you need any assistance filling in this form, make a tax planning appointment today.
4. Life Changes you don’t realize impacts your taxes.
Certain changes we go through in life may actually impact how you file your tax return at the end of the year and the amount of taxes you may or may not owe. For example, if you experience a divorce during the year, you will be considered unmarried for the whole year as far as your tax return is concerned. Therefore, you will only be able to file as single or head of household depending upon your situation.
Tax planning throughout the year helps uncover the impact of this change and others you may experience in the year, like having a baby or adopting a child, starting a new business, etc. This is why we are accessible even after tax season to help our clients.
If you found that any of the reasons for owing taxes apply to you, we invite you to schedule a mid or pre-yearend tax planning session now.
