Need to Pay Estimated Income Taxes?

The IRS requires taxpayers to pay their income tax liability as their income is earned. States that charge income tax and the District of Columbia have similar rules. Employers withhold and remit income taxes to cover their employees’ tax liability on wages and other compensation. Job done. But taxpayers with non-compensation income like interest, dividends, capital gains, prizes and awards may have to make estimated tax payments to cover the related income tax liability.

Taxpayers with profits from self-employment must regularly assess their need to make estimated income tax payments, as well as other taxes such as the self-employment tax. “Regularly” means at least quarterly. All the necessary details about making payments, when and how much are at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

It’s a lot to read, so let’s boil it down to three important things to know:

  1. When are Estimated Taxes Due?

For estimated tax purposes, the year is divided into four quarters. Although some payment due dates changed temporarily due to COVID, estimated tax payments are generally due on April 15, June 15, September 15, and January 15 of the following year. If the payment due date falls on a Saturday, a Sunday, or a legal holiday, the payment is due the next business day.

  1. How Much Do You Need to Pay?

Estimated tax payments are based on estimated income and resulting tax liability. An estimated tax payment is due if the liability is at least $1,000, after subtracting withholding and refundable credits. Withholdings or estimated payments must equal or exceed the smaller of 90% of your 2021 tax liability, or 100% of your 2020 tax liability. Calculate your 2021 tax liability at this link https://www.irs.gov/forms-pubs/about-form-1040-es

  1. What if You Don’t Pay Enough?

Interest is due on any unpaid balance, accrued daily from the time the tax liability was created (i.e., by receiving income) until the tax is paid. Interest accrues daily, which can really add to your tax bill. Clearly, the IRS is serious about getting paid on time. Figure your 2021 federal income tax bill by using the IRS Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator.

Taxpayers who paid a lot when filing their 2020 income tax return and those who receive income with no tax withholdings should look at whether 2021 estimated income tax payments are needed. The IRS has all the tools to figure it out at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

Protect Your IRS Tax Identity

It’s not big news that scams, frauds, and identity theft are on the rise. New, pandemic-inspired scams related to Economic Impact Payments (EIPs) and Paycheck Protection Program (PPP) funds have started, while income tax filings and financial information remain big, juicy targets for criminals. 

Scrabble tiles spelling "who are you" in a square.

The IRS has responded by expanding its Identity Protection Program to any taxpayer who can verify her or his identity, instead of being limited to taxpayers who report an identity theft issue. The IRS and the tax preparer community want to inform taxpayers about the Identity Protection PIN Opt-In Program to protect against tax-related identity theft when filing a federal income tax return.

Six things to know about the Identity Protection PIN Opt-In Program (IP PIN):

  1. The IP PIN is a six-digit code known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayers’ personally identifiable information.
  1. To obtain an IP PIN, the best option is Get an IP PIN, the IRS online tool. Taxpayers must validate their identities to access the tool and their IP PIN. Before attempting the process, see Secure Access: How to Register for Certain Online Self-Help Tools
  1. Once issued by the IRS, the taxpayer’s tax account is locked, and the IP PIN serves as the key to opening that account. Electronically-filed federal income tax returns that do not contain the correct IP PIN will be rejected and a paper return must be filed.
  1. An IP PIN is valid for one specific calendar year. A new IP PIN must be obtained for each filing season.
  1. Current tax-related identity theft victims who have been receiving IP PINs via mail will continue to receive an annual IP PIN to file her or his federal income tax return.
  1. There is no opt-out option. The IRS is working on it for 2022. Taxpayers who cannot provide an IP PIN or obtain a replacement can’t unlock her or his tax account and must file the return in paper form. Any refund will take several weeks to process.

The IRS IP-PIN Program is an option for taxpayers to protect her or his identity from theft and fraudulent tax filings. For taxpayers that want to use the program, the IRS offers more information and instructions at this link – https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin.

Tax Balance Payment Options

Believe it or not, the IRS is still opening mail and processing tax returns that stacked up during the COVID-19 pandemic. Another IRS task that backed up over the last year is sending notices to taxpayers who have outstanding tax balances. If an IRS notice arrives in your mailbox, don’t panic. Open it right away, read it carefully, and verify the contents with your tax records. 

Even if the notice is due to an IRS mistake, you need to respond to get your tax records corrected. But what if the notice is accurate and you do owe taxes to the IRS? How can you pay?

The IRS offers several payment options, depending on your situation:

  1. Pay Now – Paying the full balance online is free if you can have the balance due debited from the bank account of your choice. Paying by credit card is an option but the fees are high, so make sure that you read the fine print first before making your decision. https://www.irs.gov/payments/online-payment-agreement-application
  1. Short Term Payment Plan – If you can pay the amount due in 120 days or less and the total amount due is less than $100,000, this could be the best option for you. No set-up fee is charged, and you can pay via direct debit from the bank account of your choice. https://www.irs.gov/payments/online-payment-agreement-application 
  1. Installment Agreement – If you need more than 120 days to pay, this option requires a set-up fee of between $31 and $225. Installment Agreements may require some financial information from you, depending on the amount due. https://www.irs.gov/payments/payment-plans-installment-agreements#costs
  1. Offer in Compromise – The IRS wants to collect all taxes due but does not want to create a financial burden on taxpayers. An Offer in Compromise allows you to settle your tax debt for less than the full amount owed if paying your full tax liability would create a financial hardship. See if you qualify at https://www.irs.gov/payments/offer-in-compromise.
Other considerations to keep in mind are:
  • Payment plan applications are generally easier to get approved for lower tax liabilities due than for large balances. 
  • The application process differs based on the tax liability outstanding. For example, applications for $10,000 or less are automatically approved as a guaranteed Installment Agreement. Amounts over $50,000 require a more thorough review to determine if assets can be liquidated to pay the taxes due.

The IRS has been catching up with its pandemic backlog, including sending out notices to taxpayers who have outstanding tax balances. If an IRS notice arrives in your mailbox, check it against your records. Really owe what it says? Remember that the IRS offers several payment options, depending on your situation.

Tax Assistance Without the Wait

If you’ve ever called the IRS with a tax question, you know how challenging it can be. A recent report from the Taxpayer Advocate, an independent entity within the IRS, indicates that those challenges are not going to get better any time soon. Tax return processing delays and taxpayer call answer rates have gone from pretty darned bad in the pre-pandemic years to absolutely abominable now. 

For example, at the end of the 2021 tax filing season, the IRS had a backlog of about 35 million tax returns. Pre-pandemic, at the close of the 2019 tax filing season, the IRS had a backlog of 7.4 million returns awaiting manual review. And trying to call the IRS is ridiculous! During the 2021 filing season, only nine percent of the 167 million calls received by the IRS were answered, but only after waiting on hold for an average of 20 minutes.

To help taxpayers get information without the wait, the IRS has updated its website and added features for taxpayers to get answers to general tax questions and to access taxpayer information. These three updates make it quicker and easier to get answers to your tax questions:

  1. The home page of the IRS website, www.irs.gov, has links to most of the information that taxpayers are looking for, from checking the status of your refund to learning about the latest Stimulus Payment. You can easily file your federal taxes for free, access forms and instructions, and find answers to your tax questions.
  1. The entire IRS website is available in multiple languages – Spanish, simplified and traditional Mandarin Chinese, Korean, Vietnamese, Russian, and Haitian Creole. Just navigate to www.irs.gov and use the drop-down at the top of the screen to adjust to your desired language.
  1. The IRS Online Account is an online portal that allows individual taxpayers to access their tax account information, including tax balances and payment history; set up payment plans for outstanding balances; and get copies of their tax transcripts. Access the portal and initiate your account at IRS.gov/View Your Account Information.

The IRS is working hard to make it easier for taxpayers to get answers to general tax questions, as well as for specific information about their tax balances and payments. Getting information online is common these days, so it makes sense for the IRS to take advantage of the opportunity to shift some of what would be telephone inquiries to the web. 

So, the next time you have a tax question, you don’t have to wait on hold. Just go to www.irs.gov and get your questions answered more quickly than your call would be answered by an IRS representative.

IRS “Dirty Dozen” Top Tax Scams for 2021

In late June, the IRS announced its Dirty Dozen Top Tax Scams for 2021. Unfortunately, the top scams don’t change much from year to year. That’s why the IRS works hard annually to communicate the different illegal schemes perpetrated by scammers against millions of people. 

This year, the IRS began its “Dirty Dozen” list for 2021 with a warning to tax professionals, taxpayers, and financial institutions to be on the lookout for scams that fall into four categories:

  1. Pandemic-related scams
  • EIP or Refund Theft: Refund fraud and theft remain an ongoing threat. Criminals this year also turned their attention to stealing Economic Impact Payments (EIP) provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 
  • Unemployment Fraud: Taxpayers who lost their jobs because of the pandemic were eligible to receive unemployment benefits. Unclaimed unemployment benefits claimed by scammers using stolen personal information is reported as taxable income to the taxpayer, not the scammer.
  1. Personal information cons
  • Phishing: Don’t click on links claiming to be from the IRS because it could be a fake email looking to steal personal information. Be wary of any emails with embedded links − they may be nothing more than scams to steal confidential financial information.
  • Ransomware: Ransomware is malware that infects a victim’s computer, network or server and looks for and locks critical or sensitive data with its own encryption. In some cases, entire computer networks can be adversely impacted until the ransom is paid.
  1. Ruses focusing on unsuspecting victims 
  • Senior Fraud: Seniors are more likely to be targeted by scammers than other people. They are also becoming more comfortable with evolving technologies, such as social media. Unfortunately, that gives scammers another means of taking advantage.
  • Threatening Impersonator Phone Calls: A common scam is a bogus threatening phone call from a criminal claiming to be with the IRS. The scammer attempts to instill fear and urgency in the potential victim.
  1. Schemes that persuade taxpayers into unscrupulous actions 
  • Unscrupulous Return Preparers: Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season. They commit fraud, harming innocent taxpayers, or talk taxpayers into doing illegal things, like inflating deductions.
  • Offer in Compromise Mills: Misleading tax debt resolution companies can exaggerate the chance to settle tax debts for “pennies on the dollar” through an Offer in Compromise (OIC) for a hefty fee. Turns out, an OIC is only available to a small number of qualified taxpayers.

Don’t get caught by one of the IRS “Dirty Dozen” top tax scams. Read about how to protect yourself here –  https://www.irs.gov/newsroom/irs-wraps-up-its-2021-dirty-dozen-scams-list-with-warning-about-promoted-abusive-arrangements.

Not Ready to File by May 17?

For the second year in a row, the income tax filing deadline is delayed. This year, the filing due date for the IRS and most states is May 17th instead of the “normal” April 15th. Despite the delay, the tax deadline can sneak up on you. If you’re in a panic because you haven’t started gathering your tax documents, you can probably relax. 

You can request a tax filing extension to postpone from May 17th to October 15th. You don’t need to provide a reason for needing the extension, but it does take a little time to get it done right and avoid possible underpayment penalties.

Three tips for getting an income tax filing extension:

  1. You Must Apply

Individuals can request a tax filing extension by filing IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, online at the IRS website, via approved tax software, or in paper form. It must be sent or postmarked no later than midnight on the original due date. The extension is automatically approved if a refund is expected or if the estimated amount due is paid with the extension request.

  1. Pay Amounts Due

Use the IRS Form 4868 instructions at https://www.irs.gov/pub/irs-pdf/f4868.pdf to estimate your 2020 income tax liability. Compare your estimated taxes to your tax withholding or quarterly estimated payments and enter the numbers on the extension request. If you owe more in taxes than you’ve paid in, the balance due must be paid with the extension request. Failure to pay the amount due results in an underpayment penalty and interest accrued daily on the unpaid balance.

  1. Check Your State

Each state has its own set of rules and processes for its residents to request an income tax filing extension. As mentioned above, most states followed the IRS and delayed their 2020 tax filing deadline, but some did not match the IRS’ May 17th deadline. Check your state’s tax department website for deadline updates and links to information about requesting an extension of time to file for 2020.

Rushing at the last minute is stressful and causes mistakes, especially with an already stressful activity like filing your income tax returns. Get more time to file your 2020 federal income tax return by requesting a tax filing extension. Go to the IRS website at https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return for details and help estimating any taxes you owe with the extension request.

Enhanced Child Tax Credit for 2021

Tax rule changes in recently-passed Congressional bills in response to the pandemic are head-spinning. Overall, these changes provide targeted financial support and tax relief for people who have suffered financial hardship because of COVID-19. The IRS just came out with guidance on one of these changes, an enhanced Child Tax Credit. Temporary changes to the Child Tax Credit are intended to provide relief to taxpayers with eligible dependent children and bridge the financial gap until the American economy recovers.

The enhanced Child Tax Credit is part of the $1.9 trillion American Rescue Plan that President Joe Biden signed into law in March 2021. Formally called Child Tax Credit Improvements for 2021, families need to know about its valuable provisions:

  • Child Tax Credit increases are in effect for 2021 only.
  • The Child Tax Credit is increased from $2,000 to $3,000 per eligible child, for children who are age 6 and older.
  • For children under the age of 6, the Child Tax Credit is increased to $3,600 per eligible child.
  • The age for qualifying children has also been increased from children under age 17 to children under age 18. This change allows more children to be considered eligible for the Child Tax Credit.
  • The Child Tax Credit is fully refundable, meaning that eligible taxpayers could receive a tax refund that exceeds her or his tax federal withholding.
  • Income limitations for the Child Tax Credit remain at $200,000 for single taxpayers and $400,000 for married filing joint. The income limitation for the Additional Child Tax Credit is phased out by $50 for every $1,000 of modified adjusted gross income more than the threshold (e.g., $150,000 married filing joint).
  • Advance payments of one-half of the eligible Child Tax Credit will be issued in equal periodic payments from July to December 2021. Any eligible Child Tax Credit not paid in advance will be received when the taxpayer files her or his 2021 income tax return.

Guidance on the new tax rules for the enhanced Child Tax Credit is fresh off the presses. The IRS plans to post more information on its website (www.irs.gov), along with a portal for taxpayers to change personal information that may impact the amount of the advance payments, like the birth of a child or a change in which separated or divorced parent claims the child as an eligible dependent. 

These enhancements to the Child Tax Credit for 2021 are temporary. Knowing the valuable rule changes can help to bridge the financial gap for many American families.

Business Meal Deduction Update

Legislation recently passed by Congress for COVID-19 relief contains some tax rule changes that are intended to encourage taxpayer spending. One change that took effect January 1, 2021, temporarily increases the business deduction for meals from 50% to 100% until the end of 2022.  The deduction increase could provide business owners the incentive to enjoy a not-from-home meal while conducting business activities.

As usual, the temporary rules are not simple. The IRS guidance recently announced the details and definitions needed by taxpayers to follow the rules while also doubling their business meal deductions: 

  1. The temporary rules apply to any expense paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant.
  1. The term “restaurant” means a retail business that “prepares and sells food or beverages for immediate consumption.” The food or beverages can be consumed on the restaurant’s premises, carried out, or delivered. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, like a grocery store or a vending machine.
  1. An employer may not treat an on-site eating facility as a restaurant under the temporary rules, either employer-operated or operated by a third party.

Those temporary rules are in addition to all the other rules that aren’t changing for 2021 and 2022, including:

  1. Business owners also need to be present for the meal and be engaged in conducting business activities. Alternatively, the business owner must be represented by an individual who is connected to the business, such as an employee or contractor.
  1. Meals cannot be lavish or extravagant under the circumstances. 
  1. As always, a documented record must be kept of the date, amount, business purpose and attendees at the meal.

Not simple at all. But it could be worth your time to learn about the temporary rules for deducting business meal expenses. It could double your business meal deduction! Need more details? The IRS has it for you here – https://www.irs.gov/pub/irs-drop/n-21-25.pdf.