Arizona Attorney Discusses How To Avoid Penalties This Tax Season
The 2018 tax filing season is just around the corner. Before you file, you should be aware of the potential penalties if you happen to make an error. These penalties can be avoided simply by leaving no stone unturned when filing your return.
What are the common penalties?
The tax laws and codes are complex, and in many cases, difficult to fully understand. Even the smallest honest mistake can leave you with a penalty. According to The Motley Fool, this could be due to:
Failing to meet the tax filing deadline: The deadline to file your taxes this year is April 15th. A five percent penalty can be added for each month you fail to file. Once the penalty reaches a maximum of 25 percent (after five months), an additional penalty of $205 is applied. If you're unable to file by the deadline, you may file for a six-month extension prior to the deadline. This will allow you to file up to October 15th.
Failing to make payments on time: If you're unable to pay your taxes, it's important that you set up an installment agreement. For each month that you're late, a penalty of 0.5 percent is applied to your tax balance.
Not making the estimated payments as required: For most people who receive a salary or wages, this doesn't apply if taxes are already being withheld. However, if you receive income from another source, you may be required to make tax payments every quarter. To save yourself some trouble in the long run, you can fill out IRS Form 1040-ES to determine an estimate of how much you will owe throughout the year.
Withdrawing funds from IRAs, 401(k)s, or other retirement accounts too early: If you're planning to withdraw money from a retirement account, be warned that the IRS will impose a 10 percent penalty if funds are withdrawn too early. Typically, you may start withdrawing funds at age 59 and a half, unless you leave your job around, or after, age 55.
Withdrawing nonqualified funds from savings accounts with tax advantages: Tax-favored accounts include health savings accounts, 529 plans, and Coverdell ESAs. For health savings accounts, you may pay a 20 percent penalty if you withdraw money before age 65. A penalty of 10 percent can be imposed for withdrawing funds from 529 plans or Coverdell ESAs.
Incorrectly filing a tax return or entering inaccurate information: You may not be aware of a mistake you made while filing your tax return. An error that you made because of a misinterpretation can cost you a hefty penalty.
Not taking the required minimum distributions from a retirement account: If you're a retiree, there comes a time when you are required to withdraw funds from your retirement accounts. This usually happens at around 70 and a half and is determined by the value of your accounts, as well as your life expectancy. The IRS requires you to withdraw these funds by December 31st or April 1st during your first year. Failure to do so could result in a 50 percent penalty.
Contributing excess funds to accounts with tax benefits: When contributing money to your IRA or 401(k), do so with caution. Contributing too much money could result in a six percent penalty. If you already added the funds, you can remove them before the tax deadline to avoid a penalty.
Not sure where to start? An attorney can help
You may already owe enough money. On top of that, any penalties accrued can be overwhelming. If you're unable to pay your taxes, even in an installment agreement, your wages can be garnished. A lien or levy might also be placed on your property. That's why you should consult with an experienced Arizona tax lawyer as soon as possible. Contact us today to weigh all your legal options.