Don't Fall Into This Painful Tax Trap

Tax trap
Tax trap

Every year, millions of people look forward to getting their tax refunds. But if you're one of those unfortunate folks who has to write the IRS a check every year, you might get even worse news: an extra bill for interest and penalties.

Most workers have their employers withhold taxes from their paychecks. If you correctly fill out the W-4 Form that your employer gives you, then the amount taken out of your paycheck should be enough to avoid any interest and penalties.

Typically, as long as you owe less than $1,000 in tax after you account for withholding and tax credits, you're in the clear. Also, if you paid at least 90% of the tax you owed in the current year, you usually won't get hit with a penalty.

But if you owe more -- especially if you earn income as an independent contractor or own a business -- then you'll need to make quarterly estimated tax payments to avoid getting hit with penalties.

How Much Do You Have to Pay?

Calculating estimated taxes is nerve-wracking even for tax-savvy people. Figuring out how much you owe this year is hard enough. Trying to guess how much you'll owe on your return for next year seems close to impossible.

Sponsored Links

That's why the IRS has a simple rule to make it as easy as possible to avoid penalties. For most taxpayers, if you take your total tax from your last year's return and divide it by four, making four equal quarterly payments of that amount this year is guaranteed to keep you from owing penalties. For those who earn $150,000 or more in adjusted gross income, you'll have to pay slightly more -- a total of 110% of your last year's tax.

That rule works even if you have nothing withheld from any paycheck. Those who do have tax withheld can reduce their payments accordingly.

Keep Your Money

Even if you slip up, penalties aren't the end of the world. Because interest rates are so low right now, the penalty amount for your 2011 taxes is only about 3% to 4% annually.

But since it's easy to avoid penalties, there's no reason to pay even that much. So don't give the IRS more than it deserves -- keep your hard-earned money for yourself!




More on saving on taxes:

Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.
Should You and Your Spouse File Taxes Jointly or Separately?
Married couples have the option to file jointly or separately on their federal income tax returns. The IRS strongly encourages most couples to file joint tax returns by extending several tax breaks to those who file together. In the vast majority of cases, it's best for married couples to file jointly, but there may be a few instances when it's better to submit separate returns.
Read MoreBrought to you byTurboTax.com
The 10 Most Overlooked Tax Deductions
Don't overpay taxes by overlooking these tax deductions. See the 10 most common deductions taxpayers miss on their tax returns so you can keep more money in your pocket.
Read MoreBrought to you byTurboTax.com
When are Taxes Due? Important Tax Deadlines and Dates
Make sure your calendar is up-to-date with these important deadlines, dates, possible extensions and other factors in play for both individuals and businesses in 2021.
Read MoreBrought to you byTurboTax.com
Guide to Filing Taxes as Head of Household
The IRS has provided a series of guidelines to help taxpayers understand whether or not they qualify to file as head of household.
Read MoreBrought to you byTurboTax.com