The Surprise Bill Coming to Those Who Underpay Their Taxes

[dalton99a]

https://www.wsj.com/personal-finance/taxes/federal-tax-withholding-estimates-penalty-2023-e6c3736f
https://archive.ph/8Tavs

The Surprise Bill Coming to Those Who Underpay Their Taxes
The IRS penalty for shortfalls jumps to 8%
By Ashlea Ebeling
Dec. 2, 2023 9:00 pm ET

Failing to keep up with tax payments now could lead to an expensive surprise come next spring.

As of Oct. 1, the Internal Revenue Service is charging 8% interest on estimated tax underpayments, up from 3% two years ago. The increase is one of the many effects of rising interest rates.

These higher penalties, which can run in the hundreds or even thousands of dollars, are particularly relevant for gig workers and consultants who don’t have taxes withheld and figure they can pay their taxes come April. People who get steady paychecks with tax withholding could also be affected if they have additional income and get the math wrong.

For most taxpayers, their employer withholds taxes in every paycheck, with the majority due for a tax refund for having overpaid. Still, the IRS assessed more than $1.8 billion in penalties for underpaying estimated taxes on nearly 12.2 million individual returns in fiscal year 2022.

Beyond underpayment penalties, the higher total tax bills for millions of Americans increase the risk that many won’t be able to pay their full balance in April. Failing to pay all of your tax bills can lead to more penalties and—in the worst case—IRS collection actions including liens and levies.

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This article does not apply to the super rich and oligarchs

[Phoenix61]

1. Well that sucks.

I have income from investments but it varies significantly year to year.

[PoindexterOglethorpe]

2. But do you pay the taxes?

If you don't, shame on you and you're going to be charged. If you do pay the taxes, you have nothing to worry about.

I've been in that place where my income from investments varied wildly, but I always paid my taxes.

[MichMan]

5. The penalties mentioned are for not paying enough in quarterly withholding .

Even if you filed and paid the taxes on April 15 when they are due.

[PoindexterOglethorpe]

14. Yep. Pay the quarterly witholding.

Been there, done that, so zero sympathy for those who don't pay their taxes.

[Phoenix61]

13. Of course I pay my taxes.

The problem is I have no way of knowing how much they will be until the end of the year. I’d rather take the small hit then give the federal government an interest free loan.

[Freethinker65]

3. Because of investments, we (spouse and myself) are required to pay quarterly taxes based on previous year.

Last year we overpaid, but IRS did not return any overpayment. Instead they applied the extra funds towards this years quarterly payments.

[BadgerKid]

6. Normally you can choose to have overpayments refunded.

Otherwise, letting the IRS keep it is essentially granting them an interest-free loan.

[Freethinker65]

10. I thought it was a bit odd. But having first quarterly "pre-paid" was ok.

Before being in the quarterly tax paying category (because of "passive" investment income), we always owed something at tax time. Never understood people bragging about their big refunds (overpaying throughout the year). To each his own.
Then we got into a year where we owed so much, we were assessed a minor penalty. From then on we have used an accountant and paid quarterlies. Last year was the first year some overpayment was held back to pay quarterlies. Our capital gains fluctuate from year to year.

[MichMan]

4. As long as you pay on April 15, people shouldn't face fines and penalties because they didn't withhold enough.

[BadgerKid]

7. The hidden issue is required estimated tax payments.

It’s in the IRS instructions.

[MichMan]

9. Yes, I know, as I stated in post #5

Last edited Sun Dec 3, 2023, 10:31 AM - Edit history (1)

Everything else you are required to pay, like property taxes for instance just has to be paid in full by the due date. The IRS is the only entity I know of that requires periodic payments be made before it is actually due.

[DFW]

8. I'll bet a lot of people will get hit for penalties for errors by their accountants.

Since I have to file in two countries, and my returns in both countries depend on the numbers of the other country, my tax returns might as well be in Sumerian. I just hand the info to the accountants, let them do their thing, and pay the governments and the accountants what they say I owe. How am I going to dispute something written in a language I can't understand? I usually don't get hit for penalties, though, I will say that. But since between the two governments, they want between 67% and 70% of my income, I think they get enough as it is without resorting to penalties.

I remember one time (over 30 years ago now), we had to file a US return for my 7 year old daughter because of some kind of income out of the blue that required a filing, despite this being in the hundreds of dollars, not thousands. The IRS sent her out a penalty bill for something like $32, hitting her foe late penalties and interest. Knowing the prevailing attitude toward the IRS in Texas, I sent the thing to the office of my Republican Senator, Phil Gramm, and said I thought it was kind of tacky for the IRS to be harassing a 7 year old girl living in Germany who couldn't even read English yet. I got a letter from them about a month later saying the matter "had been resolved," and that we would not be hearing anything further on the matter from the IRS. I thanked the Senator's office, and promised that by the time she was 12, she would be able to read English.

[Bengus81]

11. Their talking mainly about self employed who pay little to nothing in

And then want to pay it the next April. Not fair to those of us (I was self employed) for over 40 years and made the regular estimated payments each quarter. If your short on cash you can usually get by paying a bit less one quarter and make it up the next--but you have to pay in ON TIME.

[progree]

12. A deep detailed discussion of estimated taxes and penalties is in this thread from October

https://www.democraticunderground.com/11215031

The safe harbor rules may help out, I always try to meet the safe harbor provisions. For example, if my total income taxes (federal) was $5,000 in 2022, then if I pay $5,000 (or more) in estimated taxes and withholdings in 2023, then I'm free from penalties and interest no matter how big my final tax amount for 2023 turns out to be.

One must also meet their obligations on a quarterly basis (one can't wait until December or the following Jan 15 and pay the year's estimated tax amount for the entire year in one big lump sum).

Another safe harbor provision is that if one pays in 90% thru estimated taxes and withholdings, or more, of the taxes one ends up owing, then that is OK. E.g. if I pay in $6,000 during 2023 and my tax total ends up being $6,500, then I'm free of penalties and interest for under-withholding. Because $6,000 is 92% of $6,500 which is over 90%. Of course I have to make up the $500 difference April 15.