There's Still Time to Avoid This Unpleasant (and Costly) Tax Surprise From the IRS

There is a "surprise tax" the IRS is cautioning taxpayers on as deadlines for 2022 approach, but it can be avoided.
Updated June 6, 2024
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As we approach the end of the year, the IRS has flagged a potential issue taxpayers should be aware of. The "surprise tax" has become a concerning trend, catching people off guard and leaving them with penalties for unpaid taxes. The good news is there's a simple way to avert the surprise tax before it becomes a burden.

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What is the surprise tax?

As the name suggests, the surprise tax is an unexpected tax bill that individuals may face due to inadequate tax payments throughout the year. This is especially relevant for those who don't have taxes withheld from their income and must make quarterly payments. Missing these payments can result in taxes owed and interest and late-payment penalties, potentially reaching up to 25% of the unpaid balance.

The fourth-quarter tax payment deadline for 2022 is Jan. 17, 2023. This applies to various sources of income, including investments, gig economy work, and self-employment. Failing to address these tax payments by the deadline can lead to a surprise tax bill and penalties.

How to avoid the surprise tax

The key to avoiding the surprise tax is taking proactive steps before the deadline. Taxpayers have until Jan. 17 to pay up to 90% of their debt, significantly mitigating the risk of facing penalties and interest. The IRS recommends using Direct Pay, an online platform that streamlines the payment process. It allows taxpayers to schedule payments before the deadline, ensuring they don’t get hit with any surprise bills at the end of the tax season.

Online IRS accounts provide another avenue for making payments, offering a convenient way to manage tax-related transactions and access payment history. These digital tools can make the process more efficient and less stressful.

Taxpayers can avert the surprise tax if they have paid over 90% of their 2022 taxes before the Jan. 17 deadline or 100% of the 2021 tax bill (if their adjusted gross income is below the $150,000 threshold).

Other tax tips for the end of the year

Beyond addressing the surprise tax, consider several additional tax tips as the year wraps up to help you eliminate some money stress.

  • Review deductions and credits. Look closely at potential deductions and credits that can help reduce your tax liability. This includes charitable contributions, medical expenses, and educational expenses.
  • Contribute to retirement accounts. Consider maximizing contributions to retirement accounts before the end of the year. Contributions to traditional IRAs and 401(k)s can lower your taxable income and safeguard your financial future.
  • Explore tax-efficient investments. Assess your investment portfolio for potential tax-efficient strategies. This may involve tax-loss harvesting or considering investments with favorable tax treatment.
  • Check Flexible Spending Accounts (FSAs). If you have a health or dependent care FSA, be aware of the deadline for spending the funds. Some plans may have a grace period or allow a carryover, but it's essential to understand the rules.
  • Consult a tax professional. If you have complex financial situations or uncertainties about your tax obligations, seeking guidance from a tax professional can clarify and ensure compliance with tax laws.

Bottom line

Navigating the intricacies of year-end taxes can be daunting. Still, with careful planning and proactive measures, individuals can sidestep the surprise tax and set the stage for a more financially secure 2024. By leveraging online payment tools, understanding eligibility criteria, and incorporating strategic tax tips, you can avoid unnecessary penalties and optimize your overall tax situation. As we bid farewell to the current year, let's embrace the opportunity to start the new year on solid financial footing.

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Author Details

Georgina Tzanetos Georgina Tzanetos is a former financial advisor who has been active in financial media for the past six years. She holds a master's in political economy from NYU, where she studied distressed labor markets.