In a previous post, we talked about how the average tax return is down about 8 percent from a year ago in the early filing period so far. You can refer back to that post as to why the average tax return is lower (and why a lower tax return doesn’t mean the recent tax reform isn’t working), but it’s also worth noting that some American workers may not see a refund at all. Instead, workers who aim to get as close to zero on their tax refund as possible, thereby ensuring they’re making the most money they can throughout the year and not giving the government an interest-free loan, may find themselves with an unexpected payment they have to make to the IRS this year.
In other words, for taxpayers that didn’t adjust accordingly throughout 2018, they may find themselves owing money to the IRS, and not breaking even or getting a refund. For some workers, this additional expense might be tough to come up with before the April 15 filing deadline. The good news is that there are options for workers who can’t make the payment by deadline.
Before we get into some of the options you have, we need to emphasize how it’s important to take advantage of one of the options that we’ll be mentioning below. You don’t want to fail to file a tax return on time. If that happens, you’ll get socked with some pretty significant penalties from the IRS in addition to interest on any payments that you owe, so don’t do it. Here are the only two options you should be considering:
File, but don’t pay in full: Even if you can’t pay any tax debt in full or at all, you should still absolutely file a return. Yes, you’ll wind up paying more than just what you owe the IRS in the long run, but this will be significantly less than what you’d owe if you failed to file a return at all. For instance, if you fail to file a return on time, you’ll face a penalty and then you’ll have to pay 5 percent of the unpaid balance that you owe for each month that it’s late. If you file and can’t pay, the penalty is significantly less — just 0.5 percent of the unpaid balance per month that it’s late. You’ll also pay interest on top of the penalty for each option.
File, then set up a payment plan: A payment plan is another option for workers that have to pony up money to the IRS. This may include a fee to set up, and it’s subject to 0.25 percent of the unpaid balance each month and interest, but there are a couple of nice things about going the payment plan route. Perhaps the best thing about going with a payment plan is that it’s largely on your terms. As long as the plan you’ve laid out is reasonable and settles any amount owed, it will almost always be accepted by the IRS. Another benefit is you can save money compared to the aforementioned option mentioned when filing and not paying in full.
If you’re caught flat-footed come tax time and are hit with a bill to the IRS, make sure to understand where you went wrong and make the necessary adjustments. Chances are you’ll just need to adjust your withholding at work to get that tax return back close to zero in the future. So, for instance, if you’re withholding at a 3, you might want to go down to a 2 or 1 to ensure that enough taxes are being withheld from your paycheck. In a situation that involves a major shift in the standard deduction you claimed this year compared to what you claimed in previous years, then you may have to make some further adjustments to get to where you want to be.
Remember, a tax bill or a smaller return doesn’t mean that tax reform isn’t working — it’s just that you’re getting more money in your paycheck throughout the year and less come tax time.
Regards,
Ethan Warrick
Editor
Wealth Authority
