Tax season is a stressful time for many Americans, with the fear of making a mistake and triggering hefty tax penalties looming over their heads. This year, it’s important to understand and avoid common tax moves that could result in serious consequences.
Filing taxes late without an extension is one such move that can lead to penalties. The IRS imposes a “failure-to-file” penalty of 5% of the unpaid tax for each month it’s late, maxing out at 25%. Waiting over 60 days can result in a minimum penalty of $525 or 100% of the tax owed, whichever is less. To avoid this, it’s crucial to file on time or request an extension.
Even if taxes are filed on time, paying them late can still result in penalties. The “failure-to-pay” penalty is 0.5% per month of the unpaid tax, up to 25% of the total amount owed. This penalty can add up quickly, so it’s important to set up an installment plan with the IRS if necessary.
For self-employed individuals or those with rental income, underpaying estimated taxes can lead to penalties and interest charges from the IRS. Missing the mark by more than $1,000 can result in fees, so it’s essential to calculate and submit estimated tax payments in April, June, September, and January.
Reporting income too low or not paying enough tax can also trigger penalties. The IRS imposes a 20% “accuracy-related” penalty on the underpaid portion if the tax is understated by over 10% or $5,000. This also applies to careless deductions or incorrect valuations, such as for charitable donations.
Incorrectly claiming a refund can also result in penalties. The IRS considers this an “erroneous claim” and can impose a 20% penalty on the overpaid portion. It’s essential to thoroughly check eligibility and save all documentation before filing for a refund.
For individuals over the age of 73, missing a Required Minimum Distribution can result in a 25% penalty on the amount not withdrawn. Even if the mistake is corrected promptly, there may still be a 10% penalty. It’s important to mark the calendar and schedule distributions to avoid these penalties.
Filing information returns, such as W-2s or 1099s, with mistakes or delays can also lead to penalties ranging from $60 to $340, depending on the number of forms and the length of the delay. To avoid this, it’s crucial to file all information returns accurately and on time.
Lastly, employers must withhold and remit payroll taxes on time to avoid penalties. Missed deposits can result in a 2% penalty if 1-5 days late, increasing to 10% after 15 days. For small business owners, failing to withhold and pay wage taxes can lead to penalties equal to 100% of the tax due, putting personal and corporate liability at risk.
To avoid these dangerous tax penalties, it’s essential to stay compliant and proactive. This includes filing taxes on time, paying what is owed, and keeping clear records to support deductions and claims. By following these steps, individuals can keep the IRS at bay and protect their finances.
Have you ever faced a tax penalty or missed a deadline? Share your experiences and questions in the comments below.
Further reading:
– 7 States Where Property Taxes Are Becoming Unmanageable
– What Moving to a Low-Tax State Really Does to Your Bills