How to best take care of tax liability

[hamchan]

So it turns out that for whatever reason neither me nor my DH have had enough taxes withheld in the last year. Even after deducting my IRA contributions, our HSA contributions, and my student loan interest we will still owe around 1200 this year. We may be able to pay off some of it by April, but probably not much. We have a lot of expenses coming up and I am not physically able to keep working 7 days a week.

If we do a payment plan through the IRS it will cost 50-100 up front, plus interest of about 8% I think. Or we can put it on our CC at 10.9%. I am leaning toward putting it on the cc.

So both of us have allowances set to 1, and I was also having them take out an additional 10$ a paycheck, which works out to about $40 a month. Next year we'll have higher IRA contributions and likely a higher HSA contribution, as both of these were started mid year this time. How should we adjust our withholding?

[corn18]

This calculator will help you answer your question:

IRS W-4 Withholding Calculator

[hamchan]

Thanks! That is more helpful, as long as our projections are accurate. At least we should be somewhat better off next year.

[hamchan]

Hmm, I am trying to figure out if DH can take an American Opportunity Credit for a certificate program he took at the community college last year. I am not sure if he can or not because he has a BA already. But he completed it over 15 years ago before this tax credit existed, and the most he could have gotten with a Hope credit would have been two years.

[feh]

No emergency fund?

[ua_guy]

No emergency fund?

This; and, I don't know your credit situation, but if you have to carry the balance on a credit card, are you able to take advantage of any promotional offers, i.e. 0% for a year, etc.

[hamchan]

No, no emergency fund. Last year was incredibly difficult financially between my husband's health issues and having to leave town for a funeral. Actually there have been two or three emergencies every year for the past five. The fund never lasts long.

[hamchan]

This; and, I don't know your credit situation, but if you have to carry the balance on a credit card, are you able to take advantage of any promotional offers, i.e. 0% for a year, etc.

Maybe. We don't have any on our current cards, buy could potentially apply for a new one. My credit score is about 710, and DH's is about 750.

[bjl584]

You should be able to qualify for a card with better interest than 10%. Looks like you will have to start paying estimated quarterly taxes like I do.

[hamchan]

How do you do quarterly taxes? DH might be able to get a lower interest card. I am less than two years out of bankruptcy, so even though I have a decent score it affects what cards I can get.

[scfr]

How do you do quarterly taxes?

Here is a link to IRS info on estimated taxes: http://www.irs.gov/Businesses/Small-...stimated-Taxes

You can either pay estimated taxes quarterly or adjust your withholding if you or your husband get a paycheck from an employer. A payroll withholding adjustment may be easier and also less "painful" for you because the first estimated taxes for 2014 will be due April 15, the same date the money you owe for 2013 will be due. If you are not going to be able to pay all of your tax liability on April 15, then it's safe to assume you won't be prepared to make an estimated tax payment.

Estimated tax payments are due by April 15th, June 15th, September 15th, and January 15th. As you can see, it's not every 3 months. Sometimes you go 2 months and sometimes 4.

If you use a tax software program, it can calculate the estimated taxes for you and you can print out the 1040-ES Forms (which you mail in with your payment).

One thing to keep in mind is that while it is nearly impossible to miss the annual April 15 deadline, due to all of the news coverage leading up to the due date, it will be on you to remember to mail the quarterly taxes on time. I pay estimated taxes and have to write it on my calendar, not only the due date but a reminder about a week before so that I can transfer funds to cover the payment.

One related thing: When you do your tax return, if you find that you are being charged a penalty for under-payment of taxes, write a letter to the IRS explaining the circumstances. The first year my husband was self-employed I under-estimated the self employment taxes and we would have had to pay a penalty, but I wrote a letter explaining that it was our first year of self employment and we underpaid simply due to lack of knowledge and that it wouldn't happen again and mailed it will full payment of taxes (minus penalty). The IRS waived the penalty. Now more experienced, we have never gotten ourselves in to the situation where there might be a penalty again.

Good luck getting it all figured out so that you can get the taxes owed paid by April 15th.

[hamchan]

Oh ok. Neither of us is self employed. I think part of the issue was that I worked at multiple jobs last year, some of them concurrently. Although DH's withholding was short also, and nothing had changed at all for him.

[scfr]

Oh ok. Neither of us is self employed. I think part of the issue was that I worked at multiple jobs last year, some of them concurrently. Although DH's withholding was short also, and nothing had changed at all for him.

Are you at just one job now? You will probably be okay without doing estimated tax payments. You could look at your husband's withholding and possibly adjust that to avoid owing next year.

[corn18]

There are safe harbors that allow you to not pay a penalty for underpayment:

1. You paid at least 90% of the taxes due AND
2. You paid at least as much taxes as you paid last year (or 110% if over $150,000 income)

If you meet both of those, you won't have to pay a penalty on the underpayment. If you don't meet safe harbor requirements, then you must make estimated tax payments to cover what you will owe OR you can up your W-4 withholding to cover the shortage. If you do meet safe harbor, you can still make estimated tax payments to cover the shortage. In any case, you can up your monthly withholding to. Cover any shortage as well.

[hamchan]

I am currently working for three different employers, but I have had to reduce my hours because my body just isn't letting me work as much as I did last year. Last year I made just over 41K. This year I do not expect to make much more than 30k. I am a substitute massage therapist, so I fill in when people are sick, on vacation, and during busier seasons. The flexibility is helpful because I have joint physical custody of my daughter, and it allows me to go to DH's doctor appointments with him. At least the major ones. I am looking for something less physically demanding to do on the side, but haven't found anything yet.

We will definitely be adjusting our withholding ASAP. I am not sure if we will have to pay a penalty or not. I will have to look at the numbers. How much is the penalty?