How to Avoid IRS Underpayment Penalties
Litchfield Resident Seeks Help
If you wind up owing $1,000 or more in taxes, you may incur an IRS underpayment penalty. For the last tax season, those who paid in at least 80% of their tax bill did not incur the penalty, in the future that number will be 85%. If you wind up a significant amount in taxes, it is important to adjust your tax withholdings for the current year. This may mean having your employer take more out of your paycheck or increasing estimated payments for those that are self-employed.
A self-employed resident in Litchfield ended up owing a sizable amount on her 2018 taxes. She was concerned that she may get hit with an underpayment penalty in the future and sought the advice of Merrimack Tax Associates.
Determining If You Qualify for an Underpayment Penalty Waiver
By paying at least 85% of your tax bill throughout the year you can avoid an underpayment penalty. In the past, this threshold was set at 90%, but was dropped to 80% for the 2018 tax year. If you do not qualify for this penalty waiver under these guidelines, you can go back to your previous tax year. If you paid in at least 100% of that prior year’s tax bill, you should be safe from the underpayment penalty. You will need to submit IRS form 843 to waive this penalty.
Adjust Tax Payments Accordingly
In the case of self-employed individuals, it is important that you plan your estimated payments carefully. Paying this quarterly tax to the IRS can not only head off a large bill at the end of the year, but it can also prevent you from incurring an underpayment penalty.
In the case of this self-employed Litchfield resident, with some tax planning assistance from Merrimack Tax Associates she can rest easy knowing that at the end of the year her taxes will be covered.