For some taxpayers who face an unexpected tax bill, another hit could come with it: no way to pay what’s owed by the April 15 due date.

With returns being prepared for the first time under new tax law, some people are getting caught flat-footed by owing money to Uncle Sam after past refunds or owing more than anticipated — despite lower marginal income tax rates across the board.

The reasons for the surprise bills vary, although one contributing culprit is the reduced payroll withholding rates applied in 2018. In simple terms, this means the amount withheld from worker paychecks wasn’t enough to cover their tax liability for the year. Other factors include the elimination of personal exemptions and the limited deductions available to itemizers.

If you think (or know) you’ll be unable to pay your 2018 tax bill by April 15, experts say it’s important to avoid panicking and to file your return anyway.

“Even if you can’t pay in full, you still want to file,” said Jeff Warnkin, a certified financial planner and CPA with JL Smith Group in Avon, Ohio. “You don’t want to be subject to a late-filing penalty.”

That failure-to-file levy is pretty steep: 5 percent of the unpaid balance for each month it’s late, up to a maximum of 25 percent of the amount due. So if you owe $1,000 and don’t file your return, that fee alone could reach $250 after five months.

By comparison, if you file your return even if you cannot pay the full amount due, the penalty is lower: generally 0.5 percent per month, up to a maximum 25 percent, of your unpaid taxes. So for that hypothetical $1,000 owed, if you paid none of it for five months, you’d accrue 2.5 percent from that penalty, or $25.

Also, interest generally accrues on the amount owed, which is separate from the penalty. That interest rate, which can change quarterly, is currently 6 percent.

Of course, the idea isn’t to file your return and ignore the tax debt. While the IRS will send you a bill for the balance, you also can explore setting up a payment plan.

“You designate how much you’ll pay per month, and as long as it’s reasonable, my experience is that in most cases the IRS will accept it,” Warnkin said.

More from Smart Tax Planning:
Why secret cash payments to your nanny could backfire
Getting zero back from the IRS might be a good thing
Five ways to jump-start your tax return

Depending on the length and terms of your plan, along with your income, there could be a fee to set it up. And, you’d still be on the hook for the late-payment penalty, although at a lower rate: 0.25 percent per month that the installment plan is in effect, instead of 0.5 percent, according to the IRS.

Warnkin said that if you face a tax bill this time around, it’s an indication that the same situation could crop up a year from now unless you take steps to prevent it.

“That’s where it gets really tough, because the best way is to increase your withholding from your paycheck, but that reduces take-home pay, which makes it harder to pay back what you owe,” Warnkin said. “But, you really should do something so you don’t get into an endless cycle.”

Products You May Like

Articles You May Like

BlackRock’s Fink: CEOs tell me they’re pulling their supply chains out of China
Microsoft and Nvidia are among RBC’s best ideas for sustainable investing
Amazon’s updated suspension policy still has sellers worried about getting inexplicably booted
JC Penney: We haven’t hired advisors ‘to prepare for an in-court restructuring or bankruptcy’
3 tax-planning lessons from Joe Biden’s tax returns

Leave a Reply

Your email address will not be published. Required fields are marked *