The last thing any taxpayer wants to find out when they file taxes is that they owe the IRS. Owing the IRS can be the result of many different factors, but there are ways you can help offset the amount of taxes owed or the amount of income you’re taxed on. If you find yourself in the position of owing on a tax return, familiarize yourself with some common tax filing pitfalls that can lead to you owing Uncle Sam at tax time.
Double Checking Your W-4
If you owe on a tax return, the first thing to check are your withholdings. You claim these allowances on your W-4. Although you do not want to claim too many withholdings in anticipation of a possible tax bill come tax time, withholding too little means the IRS is not collecting enough tax in advance to cover your possible tax obligation. You want to find a happy medium. Standard deductions work well if you have only one job or you're filing as single. However, if you find yourself in a different filing status like countless other taxpayers, this system doesn't work as well. You may end up having too much, or too little, withheld from your paycheck.
While you can make adjustments to your W-4 at any point in the year, the earlier you make them, the better for maximum impact on your tax return. Knowing your filing status is important because this will determine how you fill out the W-4 for your exemptions. In addition to your filing status, how you fill out your W-4 will also depend on how many jobs you have and if you have dependents. Sometimes these situations can change, meaning you might be claiming too many or too few withholdings. These withholdings are some of the factors the IRS uses to determine whether you're due a refund or if you'll owe come tax time.
What if I Have Multiple Jobs?
If you’re like 7.4 million other Americans, chances are you have more than one job, according to the Bureau of Labor Statistics. If you have more than one job, you will need to file a separate W-4 for each employer. Employers are required to send both the employee and the IRS a W-2 at the end of the year to report an employee's annual income and withheld taxes. Use this information to file your 1040. Bear in mind, you will receive a W-2 from each of your employers.
The IRS has several brackets or tax rates by which a filer’s income are taxed. When you have multiple jobs, you may find yourself in a higher tax bracket and taxed at a higher rate. If you did not have enough withheld from both jobs, you may end up owing the IRS. When this happens, you can’t do anything about it for that particular year, but going forward, take all your combined income into account and adjust your withholdings to anticipate your tax obligations.
Married Filing Jointly Status
Typically, most married couples opt to file their taxes jointly because they will usually receive a larger refund or a lower tax obligation. There are times, however, when filing a joint return may not be in the couple’s best interest. If one spouse owes back taxes, student loans or you both are high wage earners, filing separate returns might help you avoid having your refund garnished or finding yourself in a much higher tax bracket.
Couples who are married but file separately are responsible for their own tax returns and are taxed on their own income rather than combined income (and liability) like joint filers. Filing separately can keep you in a lower tax bracket than if you filed jointly. On the IRS’s website, you can find a tax withholding calculators that can show you how filing jointly or separately will impact your tax return.
If you’re self-employed, then you already know you need to be meticulous in your recordkeeping – especially when it pertains to the IRS. Self-employed filers are responsible for paying their income tax in addition to self-employment taxes that support the Medicare and Social Security programs. Filing as self-employed can be tricky as no withholdings are held from your earnings. Instead, the self-employed filer has to make quarterly estimated taxes on their earnings or risk a penalty. Self-employed filers will use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if they are required to file quarterly estimated taxes.
When you make more than $400 in income as self-employed for a given tax year you must file a tax return, including a Schedule SE. Form Schedule SE is used to determine how much in self-employment taxes you will owe when tax time rolls around. The IRS allows self-employed filers to write off or deduct 50 to 57 percent of self-employment taxes paid depending upon what you've earned.
Another possible way to reduce the amount of taxes you owe as a self-employed filer is through the formation of an S Corp or limited liability company. S Corps and LLCs can reduce your self-employment tax liability by changing the way the IRS views and taxes income earned by your company. Seek the assistance of a qualified tax professional to help explain this option and how it will affect your filing status.
What Are Some Popular Deductions and Tax Credits?
Deductions reduce your taxable income and go a long way in helping you avoid owing on a tax return. Deductions are often overlooked, under-utilized and require that you meet specific criteria for eligibility. In certain situations, student loan interest, out-of-pocket charitable contributions, reinvestment of dividends, saving for retirement and other qualifying deductions help ease the burden of owing at tax filing time. A tax credit is a sum of money that filers can subtract from the amount of taxes owed. They differ from exemptions or deductions in that they directly reduce the amount of taxes owed, dollar for dollar. Two popular tax credits are the Child Tax Credit and the Earned Income Tax Credit. These two tax credits require taxpayers to meet certain eligibility criteria.
The EITC benefits taxpayers with low to moderate incomes. In order to receive the benefits of this tax credit, you must file a return – even if you have earned less than the minimum income threshhold to file. The EITC reduces your tax obligation and if no taxes are owed, you may even receive a refund. Dependent upon the amount of income you earn, number of children you have and your marital status, qualifying for the EITC can reduce your tax bill by $3,400 with one qualifying child up to $6,318 for three or more qualifying children.
The CTC is designed to help families with the cost of raising their children. Filers must have eligible children under age 17 by end of tax year to qualify for this tax credit. Check with the IRS website to determine if you meet the eligibility criteria for this tax credit. Also included in the CTC is the Additional Child Tax Credit which allows for families to receive a refund of 15 percent of all earnings above $3,000 up to the $1,000 per child tax credit maximum.
- Turbo Tax: Top 5 Reasons to Adjust Your W-4 Withholding
- Investopedia: Withholding Allowance
- IRS: Tax Withholding
- Turbo Tax: Don’t Let Filing Multiple W-2s Scare You
- Efile: Married Filing Separately Filing Status
- IRS: 2017 Withholding Calculator
- Turbo Tax: Tips to Reduce Self-Employment Taxes
- IRS: Self-Employed Individuals Tax Center
- Legal Zoom: Reduce Self-Employment Taxes with a Corporation or LLC
- Turbo Tax: The 10 Most Overlooked Tax Deductions
- IRS: Earned Income Tax Credit (EITC)
- IRS: 2017 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates
- Tax Policy Center: What is the child tax credit (CTC)?