Get Prepared for Tax Season
Tax season is quickly approaching, and it will be here before you know it. It is a good idea to get ready and to be prepared so that when it’s time to file, you will be well-prepared. Organization is key. You should keep a file that you can add important tax information to throughout the year so that when it is time to file you don’t have to go through piles of papers and get stressed out trying to find receipts and paperwork that you need to file. All you need to do is get your file, and you should have everything that you need.
Pay Attention to Your Tax Withholding
You also need to pay attention to your withholding. Tax withholding is the amount of money that is withheld from your paychecks, and if you don’t withhold enough you will end up with a much smaller return, or you may even end up owing when your taxes are filed rather than getting anything back. If you find that you are not withholding enough from your paychecks, you can make adjustments with a Form W-4 with your employer.
Make a Prediction About Your Refund
You can also make a good prediction about what your refund will be and when you will be getting that refund. The great thing about filing your taxes is that you can normally expect to get a refund in return. Tax reform can affect how much you will receive as well as higher deductions, lower tax rates, and child tax credits. Other things that could affect your refund can include imitations on certain itemized dedications, the phasing-out of various tax benefits, as well as any personal exemptions.
Understand the Underpayment Penalty
If you are wondering, what is an Underpayment Penalty, you should know that there is a way to avoid having to pay a big fee. When you figure out the amount of tax that you owe, after you have already subtracted what you have withheld or paid in tax throughout the year, and you haven’t paid enough, you will get hit with an underpayment penalty.
This payment is based on the lesser of two important amounts. One is 90% of the amount of tax that you will pay for the year and the other is 100% of the amount of tax that you paid the previous year. These amounts can vary depending on what you do for a living. For example, if you are a farmer or a fisherman, you will use 66 2/3% of the tax rather than 90%. If your income is over $150,000 or $75,000 for Married Filing Separately, the factor will be 110% of the amount of tax paid the previous year instead of 100%.
Use the Right Form
The IRS offers a Form 1040ES to help you to figure out the amount of tax that you need to withhold and it will give you an idea of where you stand. What you want to do is avoid this underpayment penalty. You basically have three options. You can make estimated, adjust W4 withholding, and take an IRA distribution and have tax withheld from it. If the figure you come up with is over $1000 and under withholding, you need to pay the minimum in withholding or estimates, take away $1,000 from your underpayment estimate.
If you are eligible, you can have tax withheld on the distribution so that you can avoid having to make quarterly payments. You can adjust W4 withholding. If you have a regular job, you will use form W4. For pensions, you will use form W4P, and for Social Security Benefits you will use form W4V. You can adjust the amount that is withheld with the form to match what you are withholding. Just be sure that you are increasing your withholding, rather than replacing your current withholding, which is a mistake that is often made.
Make Estimated Payments
You also make estimated payments on April 15, June 15, September 15, and January 15. You can just pay 25% off the excess amount that you have calculated and postmark these amounts on or before the payment date to avoid any penalties.