What Happens If Your Taxes Do Not Go as Expected?
Tax season started Jan. 23 and taxpayers have until April 18 to file them. While you might feel prepared, there might be some tax events that you might not have thought about — or have forgotten about — that could come as nasty surprises and end up costing you a lot.
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Whatever the case might be, experts recommend staying calm and addressing the issue right away.
“Doing taxes is like renovating a house. If it goes according to plan, everyone is shocked — including the professionals hired to do the job,” said Howard Dvorkin, CPA and chairman of Debt.com. “In both cases, people can seldom predict what they’re going to find once they dig in. If someone has had any change in income — for better or worse — the only surprise would be having no surprises.”
Dvorkin said he has seen one persistent myth that costs people a lot of money: The IRS is out to get you.
“Actually, if you fall on hard times, the IRS will work with you,” he said. “Of course, this being the IRS, it’s not a simple thing. It involves terms like Offer in Compromise and Currently Not Collectible, but a tax pro can walk people through the options.”
When it comes to the IRS, Dvorkin said, the worst thing people can do is nothing, because nothing will cost them more. “Ignoring the IRS is about the only thing — other than outright criminal conduct — that makes them mad.”
Unemployment Benefits Are Taxable
If you received unemployment in 2022, it is taxable and many Departments of Labor (DOL) do not mail a paper copy so you may have an unpleasant surprise if you file your taxes without claiming that income, said Tatiana Tsoir, CPA, business expert and founder of The Bold Method.
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“You may need to log in to your DOL website and download that form and give it to your accountant,” Tsoir said. “Do your taxes quickly, so that you know if you owe anything and have two months to come up with the money.”
To avoid this, you also can choose to have tax withheld from unemployment, as federal law allows recipients to choose a flat 10% withholding from these benefits to cover part or all of their tax liability. But it is voluntary, according to the IRS.
If you can’t pay, you can check with the IRS to see whether you qualify for installment plans.
Do You Need Form 1099-NEC?
The IRS requires employers to report non-employee compensation — such as that paid to contractors, freelancers, gig workers — if they made payments above $600.
As one of these types of workers, you should receive this form (or forms) early in the tax season and use it for your tax returns.
“Make sure to report this income on your tax return,” said Andrew Latham, CFP and managing director of SuperMoney. “If you don’t, it can result in expensive penalties. Keep good records of all 1099s you receive and consider using tax software or hiring a professional to help you navigate the process.”
The key thing to remember when facing unexpected tax issues is to stay calm and don’t ignore the problem, Latham said.
“Hoping your taxes will just go away will only make things worse,” he said. “Be honest and transparent, and work with the IRS and tax professionals to find a solution. You can successfully navigate any unexpected tax situation and get back on track with a little work and determination.”
The self-employment tax rate — which you have to pay yourself — is 15.3%, with 12.4% going to Social Security and 2.9% going to Medicare, according to the IRS.
According to ADP, you also can pay your estimated taxes quarterly using Form 1040-ES, Estimated Tax for Individuals. However, be aware that you can incur penalties if you fail to pay on time.
“This pay-as-you-go approach helps them avoid a large tax bill at the end of the year,” according to ADP.
Remember To Report Investment Profits
If your investments performed well in the past year, you might have to pay taxes on capital gains and you should make sure to report all investment income, such as dividends and capital gains, on your tax return.
For dividends, you’ll receive a Form 1099-DIV, which shows the dividends payouts you received during the year. “This amount should be reported on your tax return,” Latham said.
As for capital gains, you’ll need to report the sale of any stocks, bonds or other investments on Schedule D of your tax return — and you’ll need to calculate the difference between your basis (what you paid for the investment) and the amount received from the sale, which represents your capital gain.
“If you have short-term capital gains, which are gains from investments held for a year or less, they are taxed as ordinary income,” Latham said. “Long-term capital gains, from investments held for more than a year, may be taxed at a lower rate. Remember to keep accurate records of all investment transactions, as well as any related documents, such as 1099s and brokerage statements.”
Get Help From IRS and Tax Advisors
All in all, preparing taxes might be scary and overwhelming. But experts agree that the IRS provides a lot of information on its website and you can also seek professional tax advice.
“Even if a surprise tax bill catches you off guard, remember you will probably qualify for an installment plan,” added Latham, who also recommends using the Taxpayer Advocate Service. “And, if you are going through financial difficulties, you may also qualify for a tax settlement that lowers your overall tax debt.”
In addition, as of Jan. 12, taxpayers who made $73,000 or less in 2022 can use the IRS’s Free File program, which enables them to file their taxes electronically for free.
As part of this effort, taxpayers whose income is greater than $73,000 can use Free File Fillable forms, which provides free electronic forms that they can fill out and file themselves also at no cost.
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