The new year presents another challenge for individuals and business owners alike: tax filing season is just two months away. Taxpayers might get the mental reminder of making sure that all documents are accounted for. A lot of taxpayers will start looking for the receipts and other documents received over the year.
Two months could be a lot of time for some and short for others, depending on who you’ll ask. Taxes are different for individuals and businesses. However, if there’s one thing that all taxpayers dread, that would be the underpayment penalty.
WHAT IS UNDERPAYMENT PENALTY?
What is an underpayment penalty? An underpayment penalty is the fee imposed when the taxpayer failed to pay the tax obligation he or she has throughout the year. This fee can be imposed if the taxpayer failed to clear his or her obligation because the payroll withheld was insufficient or because the taxpayer failed to make a timely payment. The form used in this fee is the Form 2210.
HOW TO AVOID UNDERPAYMENT PENALTY?
There are ways to avoid an underpayment penalty, but there might be requirements that need to be fulfilled. To avoid an underpayment penalty, make sure that you fulfill the requirements listed below.
– the taxpayer owes less than $1,000
– the taxpayer already paid 90% of the estimated tax for the current year through the income tax withholding
– the taxpayer already paid 100% of the estimated tax from the last year through the income tax withholding
– if the taxpayer suffered a casualty event, a disaster, or unusual circumstances outside of his or her control (waived by IRS)
– the taxpayer is retired (62 years old) or became disabled during the tax year (unless the cause is willful neglect) (waived by IRS)
The second and the most effective way to avoid an underpayment penalty is to always make sure to pay on time. Some receive an underpayment penalty because of the taxpayer’s failure to pay on time. And these late payments might be because of the taxpayer making a last-minute effort in organizing his or her tax documents. If you’re always getting fees, maybe you should consider assessing your way of keeping your tax documents.
WHAT ARE THE DOCUMENTS TO KEEP FOR THE TAX SEASON?
- Online transactions
- Invoices and receipts (even those under $75)
- Bank statements
- Payroll records
- Credit card receipts
- Previous tax returns
- Tax filings
TIPS IN FILING YOUR TAX DOCUMENTS
Wait, what do you mean by filing the documents, you say? It is important to file your tax documents and sort them as you receive them. This is because filing documents as you receive them reduces the chance that those documents will be misplaced. Filing documents will also make it easier to take account things that are missing or misplaced.
To effectively file your tax receipts and invoices, you must have somewhere to put your documents first. If you do not receive a lot of documents for each tax season, an envelope is enough. However, if you are receiving tons of documents, a filing cabinet is handy. You might also want to consider using folders and separating each of the documents based on its type. If you receive documents on a monthly basis, you might also consider sorting your documents by months.
Store your files in folders that are labeled properly. You can use recycled folders to reduce the expenses in maintaining your files. Taping the label instead of writing them on markers will help you recycle the folders again. If you don’t want to use folders, binders might do the trick for you.
Binders can store more papers cleanly and can handle papers with bigger sizes. It can also prevent different-sized papers to be stored in one place. You don’t also have to worry about receipts falling out of places.
Storing your documents in an envelope is an easier option if a lot of receipts of different sizes needs to be stored. Make sure to use envelopes that have locks to prevent things from falling out, especially if it is already overloaded with contents.
It is also important to label the cabinets and drawers properly, either by year, by month, or by the type of the documents stored inside. Print the labels and attach it using scotch tape for a better labeling practice.
What documents do you keep during tax season?