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    Basics of estimated taxes for individuals

    FS-2019-6, April 2019 - The U.S. tax system operates on a pay-as-you-go basis. This means that taxpayers need to pay most of their tax during the year, as the income is earned or received.

    Basics of estimated taxes for individuals

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    FS-2019-6, April 2019

    The U.S. tax system operates on a pay-as-you-go basis. This means that taxpayers need to pay most of their tax during the year, as the income is earned or received. Taxpayers must generally pay at least 90 percent (however, see 2018 Penalty Relief, below) of their taxes throughout the year through withholding, estimated or additional tax payments or a combination of the two. If they don’t, they may owe an estimated tax penalty when they file.

    The IRS has seen an increasing number of taxpayers subject to estimated tax penalties, which apply when someone underpays their taxes. The number of people who paid this penalty jumped from 7.2 million in 2010 to 10 million in 2017, an increase of nearly 40 percent. The penalty amount varies but can be several hundred dollars.

    The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. As a result, many taxpayers may need to adjust the amount of tax they pay each quarter through the estimated tax system.

    Here are some simple tips to help taxpayers:

    Who may need to pay estimated taxes

    Individuals, including sole proprietors, partners and S corporation shareholders, may need to make estimated tax payments if:

    they expect to owe at least $1,000 when they file their tax return.

    they owed tax in the prior year.

    Taxpayers who may need to make estimated tax payments include someone who:

    receives income that isn’t from an employer, such as interest, dividends, alimony, capital gains, prizes and awards.

    has tax withheld from their salary or pension but it’s not enough.

    has more than one job but doesn’t have each employer withhold taxes.

    is self-employed.

    is a representative of a direct-sales or in-home-sales company.

    participates in sharing economy activities where they are not working as employees.

    Wage-earners and salaried employees can avoid estimated tax payments by having their employer withhold tax from their wages. To determine the right amount to withhold, use the Tax Withholding Estimator , available on IRS.gov.  Then, based on its recommendations, they can use Form W-4, Employee’s Withholding Allowance Certificate, to tell their employer how much tax to withhold from their pay. Anyone can change their withholding any time during the year.

    When to pay estimated taxes

    For estimated tax purposes, a year has four payment periods. Taxpayers must make a payment each quarter. For most people, the due date for the first quarterly payment is April 15. The next payments are due June 15 and Sept. 15, with the last quarter’s payment due on Jan. 15 of the following year. If these dates fall on a weekend or holiday, the deadline is the next business day.

    Farmers, fishermen and people whose income is uneven during the year may have different rules. See Publication 505, Tax Withholding and Estimated Tax, for more information.

    If a taxpayer doesn’t pay enough or pays late, a penalty may apply.

    How to figure estimated taxes

    The IRS recommends that everyone do a paycheck checkup in 2019, even if they did one in 2018, to determine if they need to adjust their tax withholding or make estimated tax payments throughout the year. Although especially important for anyone with a tax bill for 2018, it’s also important for anyone whose refund is larger or smaller than expected. By changing withholding now or making estimated tax payments, any taxpayer can better ensure they get the refund they want next year. For those who owe, making estimated tax payments in 2019 is the best way to head off another tax-time surprise a year from now.

    Taxpayers should also make adjustments throughout the year if changes occur. When figuring their estimated taxes each year, taxpayers need to account for life events, like marriage or the birth of a child, that may affect their taxes. They should also adjust for recent changes in the tax law.

    Individuals, sole proprietors, partners and S corporation shareholders generally use the worksheet in Form 1040-ES. They’ll need to know their expected adjusted gross income. They’ll also need to estimate their taxable income, taxes, deductions and credits. Some taxpayers find it helpful to use information from their prior year’s tax return when they complete the worksheet. Their estimates should be as accurate as possible to avoid penalties.

    Some taxpayers earn income unevenly during the year. For example, a boat repair business might do more business in the summer. Taxpayers like this can annualize their income. Under this method, they’d make unequal tax payments, based on when they receive their income, rather than four even payments. Doing so could help them avoid or lower a penalty because their required payment for one or more periods may be higher with this method. See Worksheet 2-9 in Publication 505.

    How to pay estimated taxes

    Taxpayers can pay online, by phone or by mail. The Electronic Federal Tax Payment System and IRS Direct Pay are two easy ways to pay. Alternatively, taxpayers can schedule electronic funds withdrawal for up to four estimated tax payments at the time that they electronically file their Form 1040.

    Taxpayers can make payments more often than quarterly. They just need to pay each period’s total by the end of the quarter. Visit IRS.gov/payments for payment information.

    Source : www.irs.gov

    What Is Tax Liability? the Amount of Taxes You Owe to the IRS

    Estimate your tax liability by adding up all your income and subtracting deductions. Then, apply that figure to the tax tables for your filing status.


    Your tax liability is the amount of taxes you owe to the IRS

    Tanza Loudenback Updated Mar 21, 2022, 12:49 PM

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    This article was expert reviewed by Sheneya Wilson, MS, MBA, CPA, an accountant and CEO of Fola Financial.

    Expert Reviewed

    Certain deductions and credits can help reduce your tax liability. shapecharge/Getty

    Your tax liability is the amount of taxes you owe to the IRS or your state government.

    Your income tax liability is determined by your earnings and filing status.

    Certain deductions can lower the amount of income taxed, and credits can further reduce how much you owe.

    See Personal Finance Insider's picks for the best tax software »

    Get the latest tips you need to manage your money — delivered to you biweekly.

    Most Americans who earn an income are responsible for giving a cut to the government.

    How much you owe to the IRS depends on your filing status and earnings and is known as your tax liability.

    What is tax liability?

    America has a progressive tax system with seven

    income tax

    Federal income tax calculator: Estimate your 2021 refund, or how much you owe the IRS, in a few easy stepsBefore you file your return, estimate your IRS refund, or how much you owe, and see your effective tax rate using our free income tax calculator.

    Read more

    brackets ranging from 10% to 37%.

    Each filing status has its own tax brackets (although married couples filing jointly and qualifying widow(er)s use the same tax table); these represent the rates at which the individual or couple's income is taxed as they reach certain thresholds. The tax calculated is your tax liability, but not necessarily the tax due.

    Below are the tax brackets for single filers, head of household filers, and married filers that applied to income earned in 2021 and 2022. They're adjusted each year for inflation.

    Tax brackets for single filers:

    Rate 2022 2021

    10% $0 to $10,275 $0 - $9,950

    12% $10,276 to $41,775 $9,951 - $40,525

    22% $41,776 to $89,075 $40,526 - $86,375

    24% $89,076 to $170,050 $86,376 - $164,925

    32% $170,051 to $215,950 $164,926 - $209,425

    35% $215,951 to $539,900 $209,426 - $523,600

    37% $539,901 or more $523,601 or more

    Tax brackets for head of household filers:

    Rate 2022 2021

    10% $0 to $14,650 $0 - $14,200

    12% $14,651 to $55,900 $14,201 - $54,200

    22% $55,901 to $89,050 $54,201 - $86,350

    24% $89,051 to $170,050 $86,351 - $164,900

    32% $170,051 to $215,950 $164,901 - $209,400

    35% $215,951 to $539,900 $209,401 - $523,600

    37% $539,901 or more $523,601 or more

    Tax brackets for married joint filers:

    Rate 2022 2021

    10% $0 to $20,550 $0 - $19,900

    12% $20,551 to $83,550 $19,901 - $81,050

    22% $83,551 to $178,150 $81,051 - $172,750

    24% $178,151 to $340,100 $172,751 - $329,850

    32% $340,101 to $431,900 $329,851 - $418,850

    35% $431,901 to $647,850 $418,851 - $628,300

    37% $647,851 or more $628,301 or more

    What are the standard deductions for 2021?

    The standard deduction is also indexed each year for inflation. Here are the figures for 2021 and 2022.

    Filing status 2022 2021

    Single $12,950 $12,550

    Head of household $19,400 $18,800

    Married filing jointly $25,900 $25,100

    How do you estimate tax liability?

    If you add up every dollar you earned in 2020 — or simply took your annual salary figure — and apply it to the tax tables above, you will likely get a higher number than what you're actually responsible for paying.

    That's because you don't pay the exact percentage for the

    tax bracket

    Here's how to find your federal tax bracket and use it to estimate what you'll owe for 2021 and 2022Your tax bracket is the rate you pay on your last dollar of income. It ranges from 10%-37%, depending on income and filing status.

    Read more

    , as the system is progressive. If you fall into the 12% tax bracket, only the income earned in excess of $9,950 in 2021 is taxed at 10%. Additionally, certain deductions will lower the amount of your income that's taxed to begin with, while certain credits can directly impact the refund amount.

    Calculating tax liability

    You can estimate your tax liability for the year by adding up all your income and subtracting any applicable deductions, and then applying that figure to the tax tables for your filing status.

    For example, if you contributed to a health savings account (HSA) or an employer-sponsored retirement plan that allows pre-tax deferrals, those amounts won't be included in your gross income.

    Further, if you paid interest on student loans or are self-employed and paid health insurance premiums throughout the year, for example, you can subtract those amounts from your gross income. These are referred to as adjustments to income, or above-the-line deductions. This results in your adjusted gross income (AGI).

    Source : www.businessinsider.com

    Do You Owe the IRS? How to Find Out

    Here's how to determine whether you owe back taxes and how to repay owed taxes, penalties and interest.

    Do You Owe the IRS? How to Find Out

    Here's how to determine whether you owe back taxes and how to repay owed taxes, penalties and interest.

    By Emma Kerr April 7, 2022


    If you owe back taxes, it’s important to act quickly and set up a plan for repayment.

    “The most important thing a taxpayer can do to help reduce penalties and expenses associated with an IRS notice is to take action right away,” says Michael Raanan, enrolled agent and president of Landmark Tax Group.

    But corresponding with the Internal Revenue Service can be confusing and chaotic, as taxpayers increasingly report erroneous notices, unanswered phone calls and processing delays from the IRS in recent years.

    So how do you know if you owe the IRS? Follow these steps when you receive any sort of correspondence from the IRS and take advantage of these resources available for understanding and paying off your tax bill.

    How Do I Know If I Owe the IRS?

    There are several ways to discover whether you owe back taxes to the IRS, including these:

    You receive a notice from the IRS via mail. The IRS will let you know if you owe back taxes with a mailed notice. To avoid scammers, remember that the IRS will never email, text, contact you initially via phone or reach out via social media.Logging in to your tax account on IRS.gov. Once you log in, you can access your tax records, make or view payments and view the amount you owe along with a breakdown of your liability by tax year.Filing or reviewing tax returns. Determining back taxes may be as simple as filing or amending a previous year's tax return.Contacting the IRS at 800-829-1040. You may choose to call the IRS to get more information on your outstanding tax bill. Of course, particularly during peak tax season months, keep in mind it may be difficult to reach a real person.

    However, determining how much you owe and why can be a challenge for some taxpayers due to the current backlog at the IRS, which consists of tens of millions of unprocessed returns that IRS Commissioner Charles Rettig says will be cleared by the end of 2022.

    "The simple answer is to respond to notices quickly," says Mitchell Freedman, a certified public agent and president and founder of M Freedman & Co. Inc. "Unfortunately, due to staffing issues, sometimes the IRS computers will generate follow-up notices because nobody has addressed the taxpayers' responses as of yet, which is sitting in a pile somewhere."

    Most importantly, never ignore a notice from the IRS. Tax professionals say it may be wise to check and double-check how much you owe using a couple of the methods above to ensure you have the correct figure, then take action.

    [ SEE:

    15 Tax Questions Answered. ]

    How Long Can You Owe the IRS?

    Typically, the IRS has 10 years from the date of first notification to complete the collection of back taxes and three years from your filing date, including extensions, to notify you of taxes owed.

    “The 10-year clock starts on the date the tax was actually 'assessed,' i.e., put on the books,” Raanan says. “But the statute date can get extended due to activity on an account, such as a bankruptcy, an appeal, filing an offer in compromise and more.”

    When a tax bill goes unpaid over a long period of time, the IRS may begin collecting through enforcement actions, which include issuing a bank levy or filing a tax lien.

    [ SEE:

    Red Flags That Could Trigger a Tax Audit. ]

    Ways to Pay Off Your Tax Bill

    If you’re unable to pay the full balance of your tax liability right away, you have options.

    “If you feel like you could put it on your credit card and they pay it off in the required 30-day time period, that’s one route,” says Mark Jaeger, vice president of tax operations at Tax Act. “The IRS does offer different types of installment agreements,” he says, noting that interest rates on these plans are around 4%, “which is a lot better than a credit card payment of 18% to 25% interest.”

    Get on an installment plan. You can apply to repay your tax bill in monthly payments. While you do, interest will continue to accrue.Request an offer in compromise. This allows you to settle your tax debt for less than the full amount owed. Filing an application is part of the process.File and pay what you can. The failure-to-file penalty is higher than the failure-to-pay penalty, so it makes sense to file your taxes and pay whatever you can. After this, work with the IRS to get on a payment plan or talk to a tax professional about your options.Request a hardship determination. If a bank levy instituted by the IRS is causing you economic hardship, the levy may be released.

    [ READ:

    What's My Tax Bracket? ]

    Regardless of which repayment method you choose, it’s important for taxpayers to establish some sort of payment plan or official relief to prevent the IRS from taking or continuing enforcement action.

    “Despite the perception of the IRS, resolving IRS back taxes is actually easier than it may appear,” Raanan says. “For back taxes, most taxpayers can either set up an affordable payment plan or receive a financial hardship approval from the IRS, which puts their back taxes aside until their finances improve. Other taxpayers may qualify for a penalty removal, a tax settlement or another type of resolution.”

    Source : money.usnews.com

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