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3 Common Personal Income Tax Problems & How to Respond
Tax problems aren't just a worry that hang 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.
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.
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 shouldn't be neglected.
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 issues and many more, contact our office so we can consult you on your state and local taxation, as well as rules for establishing nexus.
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Get to Know Prestige Accounting Services Group (previously Prestige Wealth Accounting Group)
Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.
Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.
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