The Surprise Bill Coming to Those Who Underpay Their Taxes

[question everything]

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.

(snip)

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. The U.S. tax system is pay-as-you-go, meaning you should make payments as you earn income. That can be done through withholding or by making quarterly—or even more frequent—tax payments during the year.

To avoid underpayment penalties, most filers must pay 90% of their taxes through withholding during the calendar year, or through estimated payments due quarterly. The payment for the fourth quarter of 2023 comes due Jan. 16, 2024. The IRS won’t charge an underpayment penalty if the balance due is less than $1,000 after taking into account withholding and credits. (Though it is called a penalty, it is essentially interest tied to the federal short-term rate.)

More..

https://archive.is/w3MCZ

[SWBTATTReg]

1. This shouldn't be a surprise to people. Anyone in this job situation, working as a contractor, etc., is

aware of such tax rules on making payments etc., to keep on top of the 90% requirement. These people also have to probably obtain their own insurance, etc. too.

A lot of IT programmers etc., who work as temp. workers are aware of such rules (a pain in the you-know-what still though...).

[getagrip_already]

2. Scare article.....

Nothing here is new except maybe the interest rate. Maybe. I don't ever remember it being 3%.

This is just fear mongering. This has been irs policy for a very long time.

[progree]

3. Thanks for posting. There is a lot of confusion about some aspects of it as is evident from these earlier threads

A discussion of the same article in General Discussion: https://www.democraticunderground.com/100218498093

One from Oct 24 in this forum: https://www.democraticunderground.com/11215031

EDITED TO ADD - it catches a lot of recent retirees by surprise -- first that some of Social Security is taxable for many. And then if they withdraw from traditional IRA's and 401k's to meet living expenses or RMD requirements, those are taxable income.

[CountAllVotes]

4. I overpaid on purpose for 2023

I got hit hard in 2022 because my husband died and I went through a lot of money paying for his care.

It was sickening to have to pay for hospiss (and no, it is not free!).

I found an AARP calculator that will work for everyone right here:

https://www.aarp.org/money/taxes/1040_tax_calculator.html?cmp=KNC-DSO-COR-Core-Money-Tax-NonBrand-Phrase-30851-GOOG-MONY-1040TaxCalculator-Phrase-NonBrand&gad_source=1&gclid=EAIaIQobChMI1f3CxsDkgwMVUy-tBh3f8Q-3EAAYASAAEgI4s_D_BwE&gclsrc=aw.ds

I figured it out with the forms and a pen and the result was off by only $1.00 from the results that the above calculator provides.

So, I will be getting a refund this year for the first time in ages!

I'm proud of myself doing this w/o an accountant or TurboFux.

I hope the refund appears in my checking account soon as I can sure use the money!

[Mark.b2]

5. I understandy why the IRS has the 90% rule, and I always intende to abide by it...

I just don't get why it's a thing.

If I, as a taxpayer, pay 100% of the taxes I owe for the year, I should be in the clear as long as I pay 100% of what I owe.

I can't possibly know my tax bill until I'm able to to do the final math.

There ought to be an incentive for remitting early. Conversely, there could be law that says you lose the privilege to pay after the year's over if you fail to do so, do it wrong , etc.

I know many Americans like remitting throughout the year, and they ought to be able to do so. But, taxpayers should also have the ability to do it as a lump sum at year-end.