GUEST POST: Taxpayers Surprised They Owe
By Michael C. Radtke, Partner, CPA, CVA
Chortek CPAS | Business Advisors
“Why do I owe money on my tax return?” Were you surprised by your tax returns this year? You’re not alone. Many taxpayers who received refunds last year ended up owing this year, and depending on what you’ve read, you may have heard that it has affected anywhere from 8 million new taxpayers, or 30 million people total (NerdWallet; Government Accountability Office). So, what happened? What are some figures from this year? And what can you do to prevent owing money on your taxes next year?
An April 2019 survey from NerdWallet found that 18% of Americans reported owing on their 2018 federal tax returns. Of the people who ended up owing this year, about one-third of them said that for the 2017 federal returns, they received a refund. NerdWallet extrapolated their survey findings to project that 7.9 million people who did not owe for 2017 would end up owing on their tax returns this year.
The United States Government Accountability Office reported in July 2018 that 21 percent of U.S. taxpayers would end up owing on their tax returns as a result of the new tax law changes, an increase from the projected 18 percent if tax laws hadn’t changed. This is a difference of about 5 million people.
So, What Happened?
You may be wondering why so many more people may have gotten reductions in their refunds, or even ended up owing on their tax returns.
In response to the Tax Cuts and Jobs Act, the Treasury Department and the IRS updated the withholding tables in 2018. The IRS even created a Withholding Calculator in March 2018 to help taxpayers identify whether they had an appropriate amount withheld from their paycheck, or if they should make adjustments to prevent themselves from owing. However, the changes were also reported as contributing to paycheck boosts, and some experts believed that most people who didn’t make any changes would end up in a “favorable position.” However, the IRS underestimated withholdings for many taxpayers this year, and if you didn’t adjust your withholdings during the year, you may have ended up owing when you didn’t for 2017.
What to Do When You Owe
What’s done is done this year. However, if you owe on your taxes any year, the IRS has a few options for repayment.
Paying in full or short-term payment plans
In general, it’s best to pay as much as you can as soon as possible to avoid fees and interest. If you paid right away and paid in full, you would incur no setup fees and no future penalties or interest. You can also apply for a short-term payment plan if you owe less than $100,000 and you can pay in full in 120 days or less. This option doesn’t cost anything to set up, but you will have to pay any penalties and interest until you’ve fully paid off your bill.
Long-term payment plans
If you need to pay over a period longer than 120 days, you can apply for a long-term payment plan, either though automatic withdrawals or debit/credit card payments. Setup fees vary based on your income level and the type of payment you want to use. With this, like the short-term payment plan, you will also be responsible for interest and penalties during this time until the bill is paid off.
What to Do Next Year
So, what’s on the horizon for 2019 and 2020? For one thing, a new W-4 draft is set to come out from the IRS on May 31. This W-4 is designed to better estimate withholdings for taxpayers, and is expected to be far more complex. It will be up for review mid-year and they are planning to have it ready in time for 2020 taxes. You will need to know a lot more information to use the form correctly than how you would currently calculate exemptions, like your itemized deductions, all jobs earnings, nonwage income, number of dependents, and your intended filing status.
In the meantime, you can make changes to your W-4 and adjust your withholdings, plus supplement withholdings with quarterly estimated tax payments to try and avoid a rude awakening on your 2019 returns.
If you have more questions about your tax bills or preventing owing in future years for you and your business, please contact Chortek.