by Ashlea Ebeling, FORBES dated Aug 31, 2016
Better to owe taxes in April than to get a refund, and for the 2017 tax filing season, especially important. The Internal Revenue Service today issued a warning of 2017 tax refund delays for certain taxpayers, urging folks to adjust their tax withholding now. We’re talking about your 2016 taxes that are due April 15, 2017. Good reason to pay attention; at least something you can do about it.
“People should not be caught by surprise if they get their refund a few weeks later than previous years,” said IRS Commissioner John Koskinen in the release.
A couple things are to blame. First, a new tax law effective next year requires the IRS to hold refunds a few weeks for some early filers who claim the Earned Income Tax Credit and the Additional Child Tax Credit. The IRS has to hold the entire refund, not just the portion associated with those credits, until at least February 15.
Second, the rise in identity theft is causing the IRS and state tax authorities to spend additional review time to protect against fraud. Additional safeguards will be set in place for the upcoming 2017 filing season. “We want people to be aware we are taking additional steps to protect taxpayers from identity theft, and that sometimes means the real taxpayers face a slight delay in their refunds” Koskinen said.
So what is the solution if you do not like tax refund delay? Adjust your tax withholding for the rest of 2016, so you get more take-home money now and a smaller refund. Check out IRS tips on tax withholding [https://www.irs.gov/individuals/employees/tax-withholding] and a withholding calculator [ https://www.irs.gov/individuals/irs-withholding-calculator ].
Forbes Kelly Phillips Erb explains how to complete your W-4 here [http://www.forbes.com/sites/kellyphillipserb/2016/03/11/figuring-out-your-form-w-4-how-many-allowances-should-you-claim/#54c9b5115ef8], finding the right balance between holding too little (you’ll owe Uncle Sam at tax time) and holding too much (you’ll be due a refund, which you might have to wait for).
The IRS gives an extra warning to taxpayers who work in the gig economy. If you have income outside of wages and salary: Schedule C self-employment income, capital gains, interest and dividend: you need to pay estimated taxes in quarterly installments. (You don’t have to make estimated payments if your tax due after subtracting withholding and credits is less than $1,000).
Typically taxpayers who pay estimates use what’s known as the “prior year safe harbor.” That means they pay in 100% of the prior year’s tax as estimates (or 110% if their adjusted gross income was above $150,000). Using the 100%/110% prior year safe harbor is easy but in some case it means you’re overpaying. The alternative rule to avoid penalties for underpaying estimated tax payment is to pay in 90% of your current year estimated tax.
Already in 2016, the IRS has issued more than 102 million tax refunds (out of 140 million individual returns), and the average refund is over $2,700. Most refunds will still be issued within 21 days or less, the IRS says.