No one likes owing money when it comes time to file their taxes, blaming it on their tax preparer might make them feel better, but doesn’t make the taxes go away. Here are some of the biggest reasons we saw in the 2015 season:
1. Incorrect W-2 Withholding. This seems to be a significant issue for a large number of people. When you start a job, make sure you fill out Form W-4 correctly or consult someone to help you fill it out. It might be nice to have more cash in your pocket up-front, but owing a significant amount of money come April 15th is not fun. Many people end up not being able to pay it and have to go on installment plans. Therefore, with interest and penalties they end up paying significantly more.
2. Self Employment Earnings. Those who are self-employed see their income fluctuate from year-to-year, which is the nature of being self-employed. However, when their income increases significantly over the previous year, they oftentimes don’t think about the tax implications. Many people also simply don’t understand that they will have to pay 15.3% self-employment tax on their net earnings from self-employment in addition to income tax. The 15.3% is 7.65% social security and medicare taxes that would normally be withheld from a W-2, and the other 7.65% is the employer portion of the social security and medicare taxes. To combat these issues, they should consult their tax preparer to setup quarterly estimated tax payments based on their current year income and/or consider forming an S corporation, which doesn’t pay self-employment tax, but must pay reasonable salaries to its officers.
3. Affordable Care Act (ACA) Premium Tax Credit Repayment. This is a new one for the 2015 season due to the implications of the ACA. We saw many people have to pay back a significant portion of the advanced premium tax credit because they under-reported their income when they signed up for health insurance on the exchange. If your financial situation changes during the year, make sure to inform the exchange or your health insurance broker/agent so the advanced premium tax credit can be adjusted.
As always, thank you for checking out our blog and a big thanks to all those who came to us for tax help this year.