Three Common Personal Income Tax Problems & How to Respond

Tax problems go far beyond April 15^th. There are some common year-round issues and their solutions that you may want to take into consideration.

Tax problems aren't just a worry that hangs over people's heads from January through April every year. Many of them go far beyond the numbers that you report and they can require additional evidence that your bank statements and paychecks can't provide. Additionally, the IRS isn't the only source of those problems: state tax authorities are hungry for revenue, and if you divide your time among different states, you may find it difficult to establish nexus and may even have to file taxes in multiple states. Hippo Tax Services is here for you year-round to assist should you find yourself in a circumstance requiring further explanation.

Below are some of the most common personal income tax issues people are likely to face.

1. You didn't make (or underpaid) estimated tax payments

Self-employment is the most common cause of this. When you're used to having taxes withheld from your paychecks at work, it can be a shock to have to pay taxes yourself. You can end up owing not just a large amount of self-employment and income taxes but also penalties for not making tax payments on time. Estimates must be deposited quarterly or you will face an underpayment penalty. Should you find yourself underpaid there are options to try to reduce the penalty. Annualizing your income can be tricky, but it could save you from paying unnecessary additional amounts to the taxing authorities. 

If your total tax due when you go to file is under $1,000 you won't have to worry about getting smacked with an underpayment penalty. However, it's a good idea to set aside at least 25%-30% of your income for estimated tax payments and commit to paying this amount every month if quarterly taxes are too complicated to figure out.

Other situations like freelancing on the side or rental income while you're still employed can also cause you to fall short at tax time so make sure to have extra taxes withheld from your paycheck if you don't want to make estimated payments. State tax payments also need to be taken into consideration.

2. You didn't correctly file state tax returns after moving

Moving to a state with little or no income taxes like Nevada or Florida can be appealing if your bank account feels squeezed in high-tax states like New York or California. Many people divide their time between multiple states for work or personal reasons and if it's not just a two or three week creative retreat or corporate assignment, it can make nexus difficult to determine in some cases. 

With the prospect of a lower tax burden becoming even more appealing, it seems logical to just move to the tax-haven state you've been eyeing. But even after you file for a change of address with the postal service, change your voter registration and get recognized as a resident by your new state, the high-tax state that you left is likely to also still treat you as one.

Typically, you must spend at least 183 days of the year in the other state and maintain a primary residence there. Simply having property in another state won't do if the rest of your family doesn't also live and wait there for you after your work or travel. Where you spend time outside of work also matters because where you sleep every night is ultimately what counts.

If your move is indeed permanent and your residency is valid, you may have to file a part-year resident tax return for the final months you stayed in the old state. You won't need to worry about it for following years, but keep track of how many days were spent in each state before and after moving day.

3. You neglected to file state income tax returns as a nonresident.

If you have business or rental income in another state, you may be required to file state tax returns as a nonresident. If this income is significant, it can end up producing a large tax bill if you're unprepared.

If you have an out-of-state job, chances are that your payroll provider may also be incorrectly withholding taxes for the appropriate state and/or city. In concentrated regions like the tri-state area, especially for New York City and Philadelphia residents, ensure that city taxes are being correctly withheld if you are a resident, and that withholding curtails if that is no the longer the case. There are usually reciprocity agreements among states and municipalities in areas where state lines cross, but you should carefully check to make sure you don't owe nonresident taxes in addition to what you owe your home state.

Failure to make tax payments on time, and to the right agency, are income tax problems that are often overlooked and can quickly spiral out of control. To avoid these contact our office so we can consult you on your state and local taxation, as well as rules for establishing nexus.

While these are just three issues that could arise year-round when considering your taxes, there are many more challenges that could come up. Hippo Tax Services is here to answer those questions at any time of year and help resolve any additional tax related situations.

Please check with your Curran Wealth relationship manager,
 or contact Curran Wealth Management if you have any questions.  
 518.391.4200 • info@curranllc.com

The material contained in this article is for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness.  This article is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a security.  The information contained in this article may not apply to your personal circumstances.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.  Information on taxes is based on the tax laws existing at the time of publication.  Tax laws are subject to continual change.  In addition, tax laws vary by state.  This article is not, and should not be regarded as tax or legal advice.  We cannot ensure tax consequences of any transaction.  If you would like a detailed analysis of your tax situation, with specific tax recommendations, you can discuss the possibility of pursuing a formal relationship with Hippo Tax Services, LLC.