By: Rosiland Brook

Now is the time to plan for the next tax season and have a discussion with your tax preparer so that there are no surprises. The number one question I heard this tax season was “Why do I owe, I do not understand what I’m doing wrong.” Although there are a few reasons why taxpayers may owe taxes, I’m going to focus on the top two I saw this past tax season.

The first reason is because of the Employee’s Withholding Allowance Certificate forms, Federal Form W-4 and NY State Form IT-2104. These forms completed by the employee (the taxpayer) and given to the employer instructing how much federal and state tax to withhold from the employee’s (taxpayer’s) pay. The more allowances claimed; the lower the amount of taxes withheld. There were several taxpayers this tax season that clearly claimed too many allowances which meant there were not enough taxes taken out throughout the year, and owing when they filed their taxes.

Taxpayers play the game of claiming a high number of allowances in the beginning of the year with plans of lowering their allowances half way through the year and they either forget to change the allowances or they say “I cannot afford to have the correct amount of taxes come out throughout the year.” My advice, “You cannot afford not to have the correct amount of taxes come out throughout the year!” Why owe at the end of the tax period an amount one cannot pay by the April 15th deadline?

When filling out Forms W-4 and IT-2104, (or whatever your state form may be) taxpayers can claim 0 to have additional withholding from each paycheck. Doing this, taxpayers do not owe when they file their taxes if they have enough additional funds withheld. The best thing to do is breakeven.

Taxpayers do not realize that unpaid taxes due by April 15th, interest and penalties are added to the balance. Why allow $1,500 to turn into an even larger amount? Yes, the IRS and NY State will work with the individual and allow them to request an installment payment agreement, however; this agreement does not stop the interest and penalties. Also, they may be charged a user fee by the IRS to set up a payment agreement. Think about paying $1,500 throughout the tax year as opposed to $1,500, plus interest, penalties and the user fee to set up the agreement. In the end, it is not worth it!

The second reason is because of Form 1099-G Unemployment Compensation. Tax payers are unaware that unemployment is taxable income. When applying for unemployment, if the person does not request taxes withheld, it will not happen. If taxes are not withheld from unemployment compensation, the amount will be due all at once on the total for the year. A request to withheld federal taxes from unemployment can be made by filing out the Voluntary Withholding Request Form W-4V. One may withhold 10% from each payment. Your request is voluntary and not required to have federal income tax withheld. I strongly suggest you do!

Depending on the amount of unemployment, the total may take the taxpayer into the next tax bracket. For example, if in the 10% tax bracket, after receiving unemployment you may end up in the 20% tax bracket. It is best to pay taxes throughout the year on income received than to have to pay it all at once in a lump sum.

If taxes are owed, my advice is to pay the outstanding balance by obtaining a loan or paying by credit card if possible. The interest rate and fees charged by a bank or credit card company may be lower than interest and penalties imposed by the IRS. If the tax liability cannot be paid in full and on time, the key to minimizing your penalty and interest is to pay as much as possible by the deadline. Try not to prolong the payment agreement, the longer it takes to pay, the more that is paid in the long run.