Taxes can be tricky and confusing.
Especially if you're relatively new to filing your tax return, it can be easy to make a mistake. In the past, such a mistake could lead to even worse payment penalties.
A common mistake that Americans make is withholding too little from their pay each year. In fact, reports indicate that as many as 30 million Americans are withholding too little from their paychecks.
A failure to withhold enough pay for taxes can result in penalties for underpayment when tax time comes. If you withheld too little this year, you might be nervous about getting hit with extra costs.
But that might not have to be the case for you. The IRS announced earlier this year a program of forgiveness and penalty relief for those who made this mistake.
Read on as we'll walk you through everything you need to know about qualifying for forgiveness and what benefits entail.
Last year, the General Accounting Office of the U.S. government warned that millions and millions of taxpayers could owe more in taxes. And it's true: year after year, some taxpayers are surprised to find they owe not only taxes but severe underpayment penalties.
That's much less pleasant than receiving a nice tax return check. And it's why performing a withholding checkup is vital.
Normally, avoiding this penalty payment can be quite difficult. In order to do so, a citizen would need to pay at least 90 percent of what they owe for the current year. They would also need to pay 100 percent of any previous year's outstanding costs.
The Treasury Department recently made changes that might make it even harder for Americans to properly set aside tax funds. Withholding tables were updated to reflect changes in the new Tax Cuts and Jobs Act. These changes changed the individual tax rate and doubled the standard deduction for many people.
This means there were plenty of taxpayers this year who inadvertently didn't have enough set aside due to the changes. Understanding this as a problem, the IRS rolled out their penalty relief policy for the tax year.
Changes introduced by the Tax Cuts and Jobs Acts alarmed many tax professionals. In addition to the changes above, withholding tables were not available to employers until January, and some employees didn't see a change in their withholding until the end of February.
These big changes pushed many in the tax industry to call for relief from the IRS. The IRS responded kindly in turn. They announced in an official statement that they would be offering relief to many taxpayers affected by the changes.
How does their relief plan work? The IRS has said they will waive all underpayment fees for individuals whose estimated tax payments total at least 85 percent of the taxes shown on their return.
This is a five percent decrease from previous years in terms of what a person needs to be able to qualify. This opens up the availability of forgiveness to a much wider swath of individuals.
It still might prevent some taxpayers from receiving forgiveness, but this change is a mightily appreciated one.
This change is in addition to pre-existing tax forgiveness policies that the IRS practices. Most taxpayers are familiar with the $1,000 rule, which states that you don't have to pay any penalties if you owe less than $1,000 in total.
The IRS also has the ability to waive penalties if casualty or disaster were to occur. For example, cities affected by a hurricane during tax time would not be penalized for a late submission.
If you're one of the many Americans who withheld too little from their paychecks this past year, the regulations above are probably relieving. But how do you apply or request the penalty relief that the IRS is offering?
There are a few forms that you'll need to fill out and send in. The main one is Federal Form 2210, known as the Underpayment of Estimated Taxes By Individuals form (we prefer the shorter title). Once completed, you'll include this form with your tax return.
When filling out form 2210, you'll need to specify that you qualify for the 85 percent waiver. This should be found under the 'Reasons For Filing' heading on page one of the form. If you've already submitted your tax return, you can send in form 2210 alongside a Form 1040, known as an Amended Tax Return form.
This will let the IRS know that they need to waive current underpayment fees that may be leveled against you.
The last thing you'll want is to be forced to pay fees that weren't even your fault, to begin with. The new IRS forgiveness policy can help to ensure that you aren't screwed over by changes made to the country's withholding policies.
Once you've sent in your form, don't forget to check in on your current withholding practices. There's a chance that the IRS won't be as forgiving in the coming year.
It's important to check in on new withholding taxes and make sure you're putting enough aside for taxes under the new plan. That can help you avoid underpayment penalties during tax time next year.
If you've withheld too little from your paychecks for taxes this past year, you're not alone. Millions and millions of other Americans made the same mistake. Luckily, the IRS has provided a forgiveness plan that can help you to avoid losing money.
Now you should have no more questions regarding withholding money from your weekly paystub.