Owing money for taxes is tough. It’s even worse when they add insult to injury by making you owe even more in IRS penalties. There are a number of such tax penalties out there, most of which can be avoided with some advanced planning.
If you made enough money to require you to pay taxes but failed to file a return, you will owe a penalty. Starting the day after taxes are due for that year — usually April 15, but April 18 for the 2016 tax year — you will accrue a 5-percent penalty per month on taxes due. The longer you stick your head in the sand and fail to pay your taxes, the more you’ll owe.
This one’s easy to avoid: pay your taxes! If you made more than the minimum income amount for the tax year and your filing status, or more than $400 in self-employment income, be sure to file your taxes and pay any amount due. If you can’t pay what you owe all at once, the IRS will let you set up a payment plan.
Penalty for Underpayment of Estimated Tax
Regardless of whether you work for someone else or for yourself, U.S. taxes are considered a pay-as-you-go system. This means you are required to pay taxes on the money you make throughout the year as you earn or receive it. If you work for an employer, they will generally make these payments for you by withholding them from your paycheck. If you are self-employed or own your own business, you are required to pay quarterly taxes during the year based on the amount of income you bring in.
If you expect to owe more than $1000 in taxes at the end of the year, you are required to pay quarterly taxes. If you fail to do so, you may be subject to a penalty.
There are several ways to avoid this IRS penalty. It does not apply if you have paid sufficient taxes on at least 90 percent of your income for the year or 100 percent of the amount of the taxes you owed for the previous year, whichever is smaller. Also, if your income varies throughout the year, you may be able to avoid or at least reduce the penalty using the annualized installment method. You also do not owe a penalty if you had no tax liability the previous year.
If you owe a penalty for underpayment, you will owe 2.656 percent of the total tax you owe over the $1000 threshold, plus .011 percent per day from April 15 to December 31. Ultimately, it’s in your best interest to make sure you aren’t going to owe more than $1000 in estimated taxes to the IRS. The simple way to avoid this issue is to fill out the estimated tax worksheet early in the year.
Penalty for Not Having Health Insurance
Starting in 2015, the Affordable Care Act (ACA) made it possible for many millions of Americans to have health insurance. To “encourage” individuals to sign up for health insurance, those who continued to opt out of having medical insurance were required to pay a fee. In turn, the collected fees aid in funding the program, which primarily helps low-income families and individuals who don’t get healthcare through their employers.
The penalty for choosing not to have healthcare is either a percentage of your household income or a fixed amount for each member of your household without health insurance. In 2016, the penalty was 2 percent of the household income, or $695 per person, whichever was greater.
The ACA currently allows taxpayers to find medical insurance through state-sponsored exchanges, which often provide a credit that can be applied toward monthly insurance premiums based on the taxpayer’s income level. According to Healthcare.gov, health insurance through the ACA is available for 7 out of 10 Americans for $75 or less a month. Although ultimately you may end up paying more than the fee to have health insurance, it may be worthwhile to spend that little extra and know you’re covered in case of an accident or medical emergency.
However, this penalty may not last — President Trump’s administration is currently looking into whether or not to continue the ACA.
Even though there are IRS penalties you may incur, all of them are avoidable with some advanced planning. By researching your options ahead of time, you can avoid having to pay money in addition to your taxes.
For more information on all things taxes, contact Liberty Tax directly at 1-877-at-Liberty, or visit a conveniently located Liberty Tax office near you. For real-time updates, follow Liberty Tax on Facebook and Twitter.