Are there federal taxes paid by individuals other than form 1040 line "total tax"?

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userwithconcern
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Are there federal taxes paid by individuals other than form 1040 line "total tax"?

Post by userwithconcern »

Just trying to understand. I hear lots of ordinary people owe the IRS taxes. Are there other taxes that ordinary people owe to the the IRS, other than the federal income tax, calculated as per the table on page 7 of the following IRS link:

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

On top of this, I know of the Alternative Minimum Tax (AMT) and the 3.8% Net Investment Income Tax (NIIT), and also of the Social Security Payroll Tax and the Medicare Payroll Tax (FICA taxes). Are there other taxes the IRS collects from ordinary people?

My knowledge of the tax system is very poor, and I want to make sure I am not owing any taxes to the IRS. Are there other taxes that the IRS collects from individuals usually (I do not mean in very special circumstances, just typical people)?
Last edited by userwithconcern on Sun Jun 20, 2021 8:18 pm, edited 1 time in total.
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userwithconcern
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Re: Why do many people owe the IRS taxes?

Post by userwithconcern »

And I am aware of the different rates for long-term capital gains and qualified dividends.
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Re: Why do many people owe the IRS taxes?

Post by AnilG »

Do you prefer to lend money at no interest or pay later? Why would I lend money to IRS at no interest instead of keeping that money invested and pay IRS at the end of the year?
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Re: Why do many people owe the IRS taxes?

Post by DSInvestor »

If someone gets a bonus, the bonus is taxed as supplemental income at 22% Fed. This could be insufficient for someone in a much higher tax bracket.

If spouse 1 has high income and spouse 2 has low income, the tax withholding on spouse 2 may be insufficient and result in underpayment of taxes when their incomes are combined on a joint tax return.

If you are a W-2 employee, the payroll taxes are withheld from your paycheck. In this situation you pay half of the social security and medicare taxes and the employer pays the other half. If you are self employed filing schedules S and SE, you pay self employment tax which is essentially the employee and employer sides of social security and medicare payroll taxes.
Last edited by DSInvestor on Thu Jun 17, 2021 11:46 pm, edited 1 time in total.
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Re: Why do many people owe the IRS taxes?

Post by tibbitts »

AnilG wrote: Thu Jun 17, 2021 11:40 pm Do you prefer to lend money at no interest or pay later? Why would I lend money to IRS at no interest instead of keeping that money invested and pay IRS at the end of the year?
These days the amount of interest just doesn't matter, so I don't worry about it. After using up my safe harbor last year, I'm being sure to pay plenty during the year in 2021.

But I'm not sure that's whether that's what the OP is talking about or not. "Owing" the IRS is kind of vague.
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Re: Why do many people owe the IRS taxes?

Post by bogledogle »

userwithconcern wrote: Thu Jun 17, 2021 11:34 pm I want to make sure I am not owing any taxes to the IRS. Are there other taxes that the IRS collects from individuals usually (I do not mean in very special circumstances, just typical people)?
IRS will surely let you know if you owe any taxes in case you tax preparer or software makes any mistakes. If you get forgetful with disclosure, I am sure they will remind you about that too.
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22twain
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Re: Why do many people owe the IRS taxes?

Post by 22twain »

userwithconcern wrote: Thu Jun 17, 2021 11:34 pm I hear lots of ordinary people owe the IRS taxes.
Do you mean, they have to pay the IRS something when they file their returns? That simply means they haven't withheld enough during the year from their salary, or Social Security payments, or 401(k) distributions, or whatever; or haven't paid enough in quarterly estimated-tax payments during the preceding year.

Under-paying taxes during the year (and therefore having to pay some more along with your return) isn't a problem unless the under-payment is large enough to violate the IRS "safe harbor" rules, in which case you have to pay a penalty in addition to the taxes.

Your employer has no way to know about your other sources of income, your deductions, tax credits, etc., so they cannot calculate your income tax precisely in advance, only an approximation based only on your salary. You can adjust this by filing a W-4 form with them.

Social Security and Medicare taxes don't have this problem because they're calculated as a flat rate of your gross salary only (not investment income). Your employer can calculate them easily and exactly, and withhold them so you don't have to pay any of it yourself later.
Last edited by 22twain on Fri Jun 18, 2021 12:04 am, edited 1 time in total.
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Re: Why do many people owe the IRS taxes?

Post by FiveK »

userwithconcern wrote: Thu Jun 17, 2021 11:34 pm My knowledge of the tax system is very poor, and I want to make sure I am not owing any taxes to the IRS.
Have you filed Form 1040 every year it was required? How many years has that been?
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userwithconcern
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Re: Why do many people owe the IRS taxes?

Post by userwithconcern »

Sorry for the ambiguity. By lots of people owing taxes I mean lots of people owing back taxes.

The question is, are there other taxes, other than what I have referenced above, that the IRS collects from ordinary individuals.
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Re: Why do many people owe the IRS taxes?

Post by 22twain »

userwithconcern wrote: Fri Jun 18, 2021 12:03 am By lots of people owing taxes I mean lots of people owing back taxes.
Careful! :happy "Back taxes" has a specific meaning.

If someone incurs $10,000 income tax during a year, and his employer withholds $9,500 from his salary, leaving $500 to pay at tax-filing time the following year, that's not "back taxes"... yet. It's simply his "tax due", which he has to pay before the tax-filing deadline. If he fails to pay before the deadline, then it becomes "back taxes" which are subject to both a penalty and interest charges IIRC.
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Re: Why do many people owe the IRS taxes?

Post by nisiprius »

Added, as the most important point: 0) If you make less than $57,000 and need or want tax help, contact VITA. Or, if you know someone who does, tell them about it. See this web page. This is an association of trained volunteers who help people prepare tax returns, for free.

1) As far as I know, the only tax the IRS collects from individuals is "the Federal income tax."

2) In 42 of the 50 states, there is also a "state income tax." Everything varies, even the name of the department you pay it to, but it is often the "Department of Revenue." A few cities collect an income tax, too.

3) It is your responsibility to "file a return" (or "do your taxes"), meaning to send in the forms on which you report your income. You (usually) have to do this by April 15th (they extended the deadline during the pandemic).

4) You only need to file if your income is above a certain amount. Even if you need to file, you may not need to pay any taxes. Very roughly the limit for 2020 was $12,200 for an individual, $24,400 for "married, filing jointly" but I'm just saying that to give a rough idea.

5) Here's one way people can "owe taxes." Suppose they start by working at low paying jobs. Possibly they are paid informally, their employer just gives them money or a paycheck. They might be below the income level at which you need to file a return or pay income tax. Time goes on. They get a better job or a raise that puts them above the level where they need to file and pay taxes, but they've never done it and never even thought about it, and hardly know what it is. I wonder if this is the situation you have heard about.

6) In a typical US middle-class job, at a company with more than a dozen or so people, the employer "withholds" taxes. Before you start working, you fill out various forms, including a "W4" on which give various details like the number of children you are supporting. Your paycheck is prepared by computer. You get a pay stub that shows your "gross pay" followed by a series of "deductions," money that is taken out of your paycheck. There are deductions for federal and state income tax. At the bottom is the money you are actually paid. It is informally called "take-home pay."

7) "Owe taxes" can mean more than one thing. Someone might say "last year I got a refund but, darn it, this year I owe taxes."

Typically, people are overwithheld. The amounts withheld for taxes are just estimates, based on the W4 form. Usually too much is withheld. At the start of the year, you "do your taxes" (prepare your tax returns), calculate the exact amount you owe. Usually you have paid more than that in withholding and are entitled to get a refund.

So, at the end of (say) 2020, maybe they have overpaid and are "entitled to a refund." Or, maybe they have underpaid and "owe taxes." Owing taxes in that sense isn't a problem. "Darn it, I owe taxes this year." They prepare a return, they calculate how much they owe, they file the return and pay before the April 15th deadline, and now they don't "owe taxes" any more.

8) You can file a return by filling out a paper return and mail it in. You can do it yourself on a computer. If your income is low, you can contact VITA and they will prepare it for free. There are "tax prep services," sometimes in storefronts, that prepare taxes for a fee, often $100 or so. A lot of people pay fees to "have their taxes done" when they could have VITA do it for free, or do it themselves without too much trouble.
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Re: Why do many people owe the IRS taxes?

Post by Da5id »

AnilG wrote: Thu Jun 17, 2021 11:40 pm Do you prefer to lend money at no interest or pay later? Why would I lend money to IRS at no interest instead of keeping that money invested and pay IRS at the end of the year?
One reason to choose to owe taxes is to get an extra 5k of I-bonds using the refund. I don't know of other rational reasons to deliberately overpay, though with current interest rates can't say I care as much as I used to about getting it right.
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Re: Why do many people owe the IRS taxes?

Post by RickBoglehead »

userwithconcern wrote: Thu Jun 17, 2021 11:34 pm Just trying to understand. I hear lots of ordinary people owe the IRS taxes. Are there other taxes that ordinary people owe to the the IRS, other than the federal income tax, calculated as per the table on page 7 of the following IRS link:

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

On top of this, I know of the Alternative Minimum Tax (AMT) and the 3.8% Net Investment Income Tax (NIIT), and also of the Social Security Payroll Tax and the Medicare Payroll Tax (FICA taxes). Are there other taxes the IRS collects from ordinary people?

My knowledge of the tax system is very poor, and I want to make sure I am not owing any taxes to the IRS. Are there other taxes that the IRS collects from individuals usually (I do not mean in very special circumstances, just typical people)?
The problem is "I hear". Too many people talk about things they don't understand, or do wrong, and someone hears them. :D

Many people are simply poor financial and tax planners. They over withhold on their paychecks, having no idea how much tax they're going to owe in April, but wanting "a refund". Of course it's their money coming back, but they're pretty clueless and have that _____ in mind to buy with the free money.

Some of the people also don't know what they're going to owe and underwithhold, because they do zero analysis to see what might happen due to changed circumstances. Tax time comes and they owe money they don't have, and take out a loan at high interest rates.

If you do solid financial planning, you aim to not pay one penny more than you have to, and if you will owe money you have it available. Getting a refund simply shows either the inability to plan taxes, or to budget money.

I have had a few years where I owed huge amounts on April 15th, due to large spikes in income. Also had a few where I couldn't predict accurately until late in the year, and cancelled the January estimated payment and got a refund. 2020 was such a year. I was annoyed I got a refund, but I knew it on Nov 1st.
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Re: Why do many people owe the IRS taxes?

Post by Da5id »

RickBoglehead wrote: Fri Jun 18, 2021 7:21 am If you do solid financial planning, you aim to not pay one penny more than you have to, and if you will owe money you have it available. Getting a refund simply shows either the inability to plan taxes, or to budget money.
While people nearer to the edge financially may want to care more about this, I think it is perfectly rational not to optimize. I used to care more about having my taxes closely calculated in advance and owing a bit (while paying enough to get within the penalty safe harbors). Can't say I particularly bother doing the "solid financial planning" needed at this point. I'm fine just using estimated taxes to get to 100% of last years taxes and calling it a day. I can live without the very small amount of extra interest (at today's rates) that I'd get for shooting for the 90% owed safe harbor. I've also done the overpay taxes to get the additional I-bonds purchase limit a few years, and may get back into I-bonds this year, it is not an unreasonable choice currently.

Your other points were fine. People shouldn't think of a tax refund as a "bonus", nor should they underpay by much if they won't have cash on hand to pay what is owed.
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Re: Why do many people owe the IRS taxes?

Post by Mike Scott »

A surprising number of people don't file tax forms or pay taxes until reminded by a tax due bill. In the same way, some people lose their withheld taxes / refunds by not filing.
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Re: Why do many people owe the IRS taxes?

Post by Flashes1 »

The AMT is what gets me every year. I looked into it and it's driven by my spouse and I paying approx. 6% less on W-2 tax % than our AMT tax %. That along with paying tax on TSM index dividends.

It's not an easy check to write.
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Re: Why do many people owe the IRS taxes?

Post by livesoft »

userwithconcern wrote: Thu Jun 17, 2021 11:34 pm Just trying to understand. I hear lots of ordinary people owe the IRS taxes.
...
My knowledge of the tax system is very poor, and I want to make sure I am not owing any taxes to the IRS. Are there other taxes that the IRS collects from individuals usually (I do not mean in very special circumstances, just typical people)?
I have met some folks who just didn't remember random savings accounts and investment accounts when they filed their tax returns. If they got a 1099-DIV or 1099-INT in the mail, they just didn't remember it. If they were supposed to login to an online account and download a 1099, they just professed ignorance. Or if they sold some stock or fund shares that they were gifted or inherited they perhaps thought erroneously that no taxes were involved.

I think some high school curriculum does include how to fill out a Form 1040, but I do not believe that is as common as folks might think.

Then there was that odd 2020 "don't pay FICA now -- pay it later": https://www.irs.gov/newsroom/what-emplo ... roll-taxes with this
IRS wrote:If the employee no longer works for the organization, the employer is responsible for repayment of the entire deferred amount. The employer must collect the employee's portion using their own recovery methods.
Last edited by livesoft on Fri Jun 18, 2021 8:39 am, edited 2 times in total.
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Re: Why do many people owe the IRS taxes?

Post by rebellovw »

I always owe - it used to be 10K or so between fed and state - then with the Tax changes - that dropped to 1500 - what a relief.

Started with me being a boglehead - I blame bogleheads.org :happy

Ally - lots of interest
Aftertax accounts - lots of dividends and capital gains.

It is a terrible problem to have. :D
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Re: Why do many people owe the IRS taxes?

Post by tibbitts »

I'm not convinced the OP isn't referring to actual back taxes, since that was the term used, as in taxes not timely paid. For all we know the OP isn't even subject to withholding (or isn't aware he might be) or having taxes deducted from any wages or other payments. I'm guessing this isn't an issue of making a $30 payment vs. getting a $50 refund at income tax filing time.
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Re: Why do many people owe the IRS taxes?

Post by Silverado »

tibbitts wrote: Fri Jun 18, 2021 8:41 am I'm not convinced the OP isn't referring to actual back taxes, since that was the term used, as in taxes not timely paid. For all we know the OP isn't even subject to withholding (or isn't aware he might be) or having taxes deducted from any wages or other payments. I'm guessing this isn't an issue of making a $30 payment vs. getting a $50 refund at income tax filing time.
Even a lot of the responses have not used exact enough language to be useful. Sigh….pretty natural when we are all typing online at different times from different angles.
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Re: Why do many people owe the IRS taxes?

Post by adam1712 »

I'm going to say the vast majority of people you hear about owe federal income tax, it's just they have more complicated income. If you are single and most all your income comes from your employer and reported on a W2 it's very difficult to be very off in owing taxes. Most people that I know about getting in trouble with owing the IRS a lot are small business owners such as farmers, restaurant owners, truck drivers, Uber drivers etc. who must calculate their income themselves. For a small business like a restaurant, other issues can be collecting and paying sales tax and real estate taxes. Other possibilities for individuals are large investment income that wasn't planned for, multiple jobs, and also married couples that don't calculate withholding properly.
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Re: Why do many people owe the IRS taxes?

Post by simplextableau »

He may be referring to those commercials I hear on the radio all the time for services to help people owing back taxes of $10,000 or more settle with the IRS. Honestly, I don't understand it either. Who are these people who fail to pay their taxes and how are there so many?
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Re: Why do many people owe the IRS taxes?

Post by sureshoe »

userwithconcern wrote: Fri Jun 18, 2021 12:03 am Sorry for the ambiguity. By lots of people owing taxes I mean lots of people owing back taxes.

The question is, are there other taxes, other than what I have referenced above, that the IRS collects from ordinary individuals.
There's a lot of chatter here, and you are touching on various angles on "owing money". But there are really 3 buckets, I think you're describing #3 below.

1) Some people "fail to file". Every Tax ID has to have a return filed for it - whether it's a SSN or Business FEIN. Simplifying, but the IRS basically audits this and says "where is the 1040 for SSN" and "where is the 941 for the FEIN". More to it than that, but you get the gist.

2) Some people "under withhold"? At the end of the year, you're expected to pay $50k in taxes, but you only paid $20k over the year. Oops. $30k short - now you ow that before April 17th.

3) Some people show up as "in debt" to the IRS > meaning the IRS says they owe $100k and are now garnishing wages or repossessing property?

You seem to be asking #3. The answer is generally found in #1 and #2.

Answer to #1 > Some people are just disorganized, uninformed, uneducated, and possibly lazy. So, they miss the tax deadline. Then, after forgetting to file 1 year, my accountant called it "fear of filing". They are afraid the IRS will come down on them, so they stop filing altogether, which is the ABSOLUTE WORST THING YOU CAN DO. The IRS will not "just forget about you". Penalties/interest just starts stacking up. This leads to #3. People don't file for a couple years, and the IRS sends them a letter saying "you owe $50k and we're garnishing your wages". Or some such - I don't know that part, haven't had that happen (but I work in payroll, and I've done the garnishments).

Answer to #2 > People under withhold for a lot of reasons discussed above. Sometimes on purpose, sometimes due to poor planning. In my case, getting withholding correct is a pain because of W4s between spouses and bonuses... I seem to come in $5k over or under ever year. However, some people get in trouble by messing with their W4s and purposefully withholding incorrectly. The main people who get in trouble are contractors and self-employed people who don't get auto-withholding, then they have a big tax bill at the end of the year, alongside an under withholding penalty.

Answer to #3 > See #1 and #2. The other big reason is that people falsify their returns and underreport income. Then they get audited and penalties /interest pile up. A very common reason is this: I collect sales tax and employee taxes, but I don't remit them properly. BIG TROUBLE here.

In general > if ANY money comes into your hands, you need to report to the IRS how it got there. If you have done that, you're OK. If you are choosing not to do that, you're dancing with the devil. If your rich uncle give you a $5k gift, can you get away not reporting it? Probably. If you do under-the-table work for a landscaper for $10k... maybe. If you win $20k at a backroom card game... maybe. But at some point, money coming in is going to be tracked as it becomes material.
Last edited by sureshoe on Fri Jun 18, 2021 9:03 am, edited 2 times in total.
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Re: Why do many people owe the IRS taxes?

Post by Da5id »

simplextableau wrote: Fri Jun 18, 2021 8:48 am Honestly, I don't understand it either. Who are these people who fail to pay their taxes and how are there so many?
Sometimes income is surprising. I normally know about what I'll get (and I pay 100% of last years tax due for safe harbor anyway). 2020 I owed a fair bit of money unexpectedly. Why? I own some real estate LLCs that pay K-1 income. They suspended payment in March 2020 for the year due to uncertainty about rental income due to COVID (which seemed like a fair choice), so I didn't assume I would be taxed on the remainder of the year. But they apparently got plenty of rental income, so it was added to my capital account, and was taxable even though not paid out to me as usual. This wasn't communicated to me by any means in advance, so I found it when I got the K-1s in March 2021. I could have known it was possible, just had never occurred before so I wasn't thinking about it. These things can happen. Would have been quite expensive as it pushed me over a 100% FPL boundary for the purposes of ACA MAGI, but they got rid of that penalty thankfully for me.
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Re: Why do many people owe the IRS taxes?

Post by tibbitts »

simplextableau wrote: Fri Jun 18, 2021 8:48 am He may be referring to those commercials I hear on the radio all the time for services to help people owing back taxes of $10,000 or more settle with the IRS. Honestly, I don't understand it either. Who are these people who fail to pay their taxes and how are there so many?
That's a good point that I hadn't even thought of, but the frequency of those commercials would suggest that a lot of people must owe back taxes to the IRS (and probably other taxing authorities.)
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Re: Why do many people owe the IRS taxes?

Post by alfaspider »

simplextableau wrote: Fri Jun 18, 2021 8:48 am He may be referring to those commercials I hear on the radio all the time for services to help people owing back taxes of $10,000 or more settle with the IRS. Honestly, I don't understand it either. Who are these people who fail to pay their taxes and how are there so many?
The primary reason is likely liquidity problems, especially for business owners who may not have tax withheld on their income and/or failed to pay quarterly and couldn't come up with the money to pay up at tax time. This can also happen if you sold an investment where there was no withholding, spent the money, and didn't have it come tax time. Finally, it can also happen from "phantom income" from a partnership interest where income is allocated to you but the partnership has not distributed cash.

Those ads on TV/Radio about back taxes are from "offer in compromise" mills. The IRS has a program called the "offer in compromise" for folks who are unable to pay their tax debts. You fill out an application for a reduced payment amount and payment plan based on income/assets and the IRS will accept/deny the claim. The OIC mill will take a cut of the reduction. They charge a LOT of money for what amounts to filling out a form on your behalf. You are generally much better off going to a competent CPA or attorney who charges a reasonable hourly fee.

A lot of people also rack up a lot of unnecessary tax debts by taking the "ostrich" approach to letters from the IRS. No matter what, the worst thing you can do is ignore letters from the IRS. You may lose out on the right to contest the underlying tax by doing so and/or end up with a much higher bill than if you had negotiated a payment plan up front.
Last edited by alfaspider on Fri Jun 18, 2021 9:15 am, edited 5 times in total.
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Re: Why do many people owe the IRS taxes?

Post by HootingSloth »

nisiprius wrote: Fri Jun 18, 2021 5:56 am 1) As far as I know, the only tax the IRS collects from individuals is "the Federal income tax."
Just to be pedantic (or in case others find it interesting), the IRS is responsible for collecting a wide array of taxes. The Internal Revenue Code (Title 26 of the United States Code) is broken up into a number of Subtitles.

Subtitle A covers "Income Taxes." Subtitle A is further broken up into a number of chapters, including:
  • Chapter 1, which covers "Normal Taxes and Surtaxes," and includes most of the things that we think of as "Federal income tax," including the individual income tax, the corporate income tax, dozens of federal income tax credits, the alternative minimum tax (AMT), the base erosion and anti-abuse tax (BEAT--a new one added in 2017 imposed on certain large multinational groups), and the unrelated business income tax (UBIT--imposed on certain tax exempt entities).
  • Chapter 2, which covers self-employment taxes (i.e., the 12.4% tax that must be paid by individuals who are receive certain kinds of income as sole proprietors, independent contractors, or partners, and do not pay payroll taxes on this income).
  • Chapter 2A, which covers the "Unearned Income Medicare Contribution," which is the official name for the 3.8% net investment income tax (NIIT) imposed on high-income individuals as a result of the Affordable Care Act.
  • Chapter 3, which covers "Withholding of Tax on Nonresident Aliens and Foreign Corporations," which are more commonly referred to as "withholding taxes" and must be paid to the IRS if you are making certain kinds of payments to non-US persons (because otherwise the government is afraid the non-US persons will never pay up and the IRS will not be able to enforce their tax liabilities).
  • Chapter 4, which covers "Taxes to Enforce Reporting on Certain Foreign Accounts," which is another type of withholding tax that is used to enforce the Foreign Account Tax Compliance Act (FATCA). Roughly speaking, FATCA requires foreign financial institutions (FFIs) to report information on accounts that they maintain for the benefit of U.S. persons in order to help the IRS weed out tax evasion. If an FFI fails to comply with its reporting requirements, then U.S. persons that make payments to such FFI must withhold 30% of the payment and pay them over to the IRS instead.
Subsequent Subtitles cover Federal taxes other than Federal income taxes, including (among other, even more obscure, things):
  • Subtitle B, which covers estate and gift taxes.
  • Subtitle C, which covers employment/"payroll" taxes, mostly FICA (Medicare and Social Security payroll taxes) and FUTA (unemployment taxes).
  • Subtitles D and E, which cover dozens of different Federal excise taxes, including some that "ordinary" people pay, like the ones on alcohol and tobacco, and many other more specific ones, like taxes on golden parachute payments and excise taxes used to enforce rules that apply to charities and private foundations.
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Re: Why do many people owe the IRS taxes?

Post by mrsgoldilocks »

userwithconcern wrote: Thu Jun 17, 2021 11:34 pm My knowledge of the tax system is very poor, and I want to make sure I am not owing any taxes to the IRS. Are there other taxes that the IRS collects from individuals usually (I do not mean in very special circumstances, just typical people)?
I suspect OP posted this topic because OP doesn't want to have federal tax overdue by the time OP files tax return. To avoid this, do the followings.

1) If you file your own tax, or even you have an accountant doing that, you should have a year to year tax comparison. Look over that and see how your federal/state tax increases/decreases over time. Then, compare that to your withholding, i.e. your W2 or your quarterly estimated tax and adjust accordingly.
2) if your main source of income is W2, it is in fact quite easy to "estimate" your next year tax, plus, you know how your capital gain is etc etc. You can simply use last year's tax software and quickly plug in your numbers so you know if you will be short or not. Yes, tax brackets may change but it usually won't be that off.
3) For some ordinary ppl, even if they fill out the W4 correctly (reflecting their life situation), it usually won't withdraw enough tax. if that's your case, you need to adjust it by claiming less deductions, i.e. saying you have 0 kid while you indeed have 3 little ones. In my case, I have rental properties and that increase my tax and instead of paying "estimated" tax quarterly, I specified in my W4 to deduct extra $200 per paycheck. For me, it's a matter convenience.

But I do all these estimated tax thing ONLY because if I don't, I will have to pay penalty. If there is no penalty, I won't even withhold any tax, and only pay IRS on April 15. I always don't understand why ppl want to overpay IRS (unless they want to purchase paper i-bond). And when ppl get a refund from IRS, they are so happy and feel like they should throw a party. What to celebrate for?? you're just getting your interest-free loan to IRS back ... :oops:
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Re: Why do many people owe the IRS taxes?

Post by Da5id »

mrsgoldilocks wrote: Fri Jun 18, 2021 9:17 am And when ppl get a refund from IRS, they are so happy and feel like they should throw a party. What to celebrate for?? you're just getting your interest-free loan to IRS back ... :oops:
For many people taxes are a black box, incomprehensible. They do taxes that they don't particularly understand (which is somewhat fair as the tax code is somewhat Byzantine/opaque) and get a result. If the result is that they get money, that is a pleasant surprise, particularly if they fear owing. Not saying this is a good way to handle taxes, or at all rational, but I do get it.
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Re: Why do many people owe the IRS taxes?

Post by Carefreeap »

alfaspider wrote: Fri Jun 18, 2021 9:07 am
simplextableau wrote: Fri Jun 18, 2021 8:48 am He may be referring to those commercials I hear on the radio all the time for services to help people owing back taxes of $10,000 or more settle with the IRS. Honestly, I don't understand it either. Who are these people who fail to pay their taxes and how are there so many?
The primary reason is likely liquidity problems, especially for business owners who may not have tax withheld on their income and/or failed to pay quarterly and couldn't come up with the money to pay up at tax time. This can also happen if you sold an investment where there was no withholding, spent the money, and didn't have it come tax time. Finally, it can also happen from "phantom income" from a partnership interest where income is allocated to you but the partnership has not distributed cash.

Those ads on TV/Radio about back taxes are from "offer in compromise" mills. The IRS has a program called the "offer in compromise" for folks who are unable to pay their tax debts. You fill out an application for a reduced payment amount and payment plan based on income/assets and the IRS will accept/deny the claim. The OIC mill will take a cut of the reduction. They charge a LOT of money for what amounts to filling out a form on your behalf. You are generally much better off going to a competent CPA or attorney who charges a reasonable hourly fee.

A lot of people also rack up a lot of unnecessary tax debts by taking the "ostrich" approach to letters from the IRS. No matter what, the worst thing you can do is ignore letters from the IRS. You may lose out on the right to contest the underlying tax by doing so and/or end up with a much higher bill than if you had negotiated a payment plan up front.
My mom was one of those people. At age 58 she and my dad filed BK and she divorced him after 37 years of marriage. She was a real estate agent and presumably needed some start up costs but she was also a spender. After leaving my dad she moved to the most expensive neighborhood in town but "got an appartment whuch was a really good deal". :oops: From what I recall she didn't pay enough taxes for two years. She got assessed with the 25% under payment penalty plus interest. The original debts probably totalled $20k but by the time she died at age 70 the debt had grown to $40k. :shock: The $200/mth payment plan wasn't even keeping up with the accruing interest. When settling her estate I found a book that talked about the Offer in Compromise and was puzzled why she didn't do it. Having no assets and being self employed would have seemed like a good bargaining position. In the end I found out that there is a statute of limitations on IRS debt of 10 years. Therefore while I was settling the estate (it was complicated because she had managed to buy a condo and a small rental but the estate was upside down by about $400k including the IRS debt) I kept payiing the $200/mth. Four months after she died $15k disappeared off the payment plan statement and a year later $25k disappeared. I just couldn't imagine having that kind of debt hanging over my head.
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Re: Why do many people owe the IRS taxes?

Post by Escapevelocity »

Carefreeap wrote: Fri Jun 18, 2021 9:58 am
alfaspider wrote: Fri Jun 18, 2021 9:07 am
simplextableau wrote: Fri Jun 18, 2021 8:48 am He may be referring to those commercials I hear on the radio all the time for services to help people owing back taxes of $10,000 or more settle with the IRS. Honestly, I don't understand it either. Who are these people who fail to pay their taxes and how are there so many?
The primary reason is likely liquidity problems, especially for business owners who may not have tax withheld on their income and/or failed to pay quarterly and couldn't come up with the money to pay up at tax time. This can also happen if you sold an investment where there was no withholding, spent the money, and didn't have it come tax time. Finally, it can also happen from "phantom income" from a partnership interest where income is allocated to you but the partnership has not distributed cash.

Those ads on TV/Radio about back taxes are from "offer in compromise" mills. The IRS has a program called the "offer in compromise" for folks who are unable to pay their tax debts. You fill out an application for a reduced payment amount and payment plan based on income/assets and the IRS will accept/deny the claim. The OIC mill will take a cut of the reduction. They charge a LOT of money for what amounts to filling out a form on your behalf. You are generally much better off going to a competent CPA or attorney who charges a reasonable hourly fee.

A lot of people also rack up a lot of unnecessary tax debts by taking the "ostrich" approach to letters from the IRS. No matter what, the worst thing you can do is ignore letters from the IRS. You may lose out on the right to contest the underlying tax by doing so and/or end up with a much higher bill than if you had negotiated a payment plan up front.
My mom was one of those people. At age 58 she and my dad filed BK and she divorced him after 37 years of marriage. She was a real estate agent and presumably needed some start up costs but she was also a spender. After leaving my dad she moved to the most expensive neighborhood in town but "got an appartment whuch was a really good deal". :oops: From what I recall she didn't pay enough taxes for two years. She got assessed with the 25% under payment penalty plus interest. The original debts probably totalled $20k but by the time she died at age 70 the debt had grown to $40k. :shock: The $200/mth payment plan wasn't even keeping up with the accruing interest. When settling her estate I found a book that talked about the Offer in Compromise and was puzzled why she didn't do it. Having no assets and being self employed would have seemed like a good bargaining position. In the end I found out that there is a statute of limitations on IRS debt of 10 years. Therefore while I was settling the estate (it was complicated because she had managed to buy a condo and a small rental but the estate was upside down by about $400k including the IRS debt) I kept payiing the $200/mth. Four months after she died $15k disappeared off the payment plan statement and a year later $25k disappeared. I just couldn't imagine having that kind of debt hanging over my head.
That's insane. The IRS accepted a payment plan from your Mom that didn't even cover the interest on her debt and then wrote off the principal without even attempting to claim against her estate? No wonder the IRS has such a low collection rate!
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Re: Why do many people owe the IRS taxes?

Post by mrsgoldilocks »

Da5id wrote: Fri Jun 18, 2021 9:41 am
mrsgoldilocks wrote: Fri Jun 18, 2021 9:17 am And when ppl get a refund from IRS, they are so happy and feel like they should throw a party. What to celebrate for?? you're just getting your interest-free loan to IRS back ... :oops:
For many people taxes are a black box, incomprehensible. They do taxes that they don't particularly understand (which is somewhat fair as the tax code is somewhat Byzantine/opaque) and get a result. If the result is that they get money, that is a pleasant surprise, particularly if they fear owing. Not saying this is a good way to handle taxes, or at all rational, but I do get it.
Totally agreed. So every year after I file tax for my parents, my 70+ years old mom will ask me how much refund she is getting. I explain to her that she didn't withhold any tax, so there is of course no refund. She will then walk away and asking my dad that why she is not getting any refund as her income is a lot lower now. In her mind, the refund is free money that IRS gives to her and if she having less income, she should get a bigger subsidy from IRS. :oops:
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Re: Why do many people owe the IRS taxes?

Post by fulltilt »

simplextableau wrote: Fri Jun 18, 2021 8:48 am He may be referring to those commercials I hear on the radio all the time for services to help people owing back taxes of $10,000 or more settle with the IRS. Honestly, I don't understand it either. Who are these people who fail to pay their taxes and how are there so many?
I assumed that is what OP was talking about as well.

Judging by the other ads i see on TV at the same time, i am guessing it is mostly elderly people and/or people of very limited means.

I can think of a lot of ways an "average" person could get into a situation where they have not withheld enough for taxes and don't have the money to pay in when it comes time to pay in.
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Re: Why do many people owe the IRS taxes?

Post by stan1 »

Small business owners who don't pay enough estimated taxes (and who don't properly withhold FICA/Medicare).

People who have cash income and don't have withholding.
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Re: Why do many people owe the IRS taxes?

Post by deltaneutral83 »

AnilG wrote: Thu Jun 17, 2021 11:40 pm Do you prefer to lend money at no interest or pay later? Why would I lend money to IRS at no interest instead of keeping that money invested and pay IRS at the end of the year?
This strategy is for the financially literate. Unless you're in the safe harbor, if you owe a 4 figure amount, you pay penalties and interest I think at the Federal level. A)Most Americans don't have four figures laying around and to move the needle on this exercise I assume you'd need to owe more toward 6 figures? B) Most people think "safe harbor" is an aquatic term. C) Interest on cash is virtually non existent and if you're keeping the money in equities it's simply gambling when you consider a duration of 12 months or fewer until you pay Uncle Sam IMO. I keep a crude little spreadsheet that shows all income and estimated taxes and tinker with withholding out of check starting about Thanksgiving. Usually get it to within $2k of $0 either way so modest refund or very small amount in penalty.
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Re: Why do many people owe the IRS taxes?

Post by nisiprius »

fulltilt wrote: Fri Jun 18, 2021 10:43 amI can think of a lot of ways an "average" person could get into a situation where they have not withheld enough for taxes and don't have the money to pay in when it comes time to pay in.
One thought that struck me: what about a person working hard for years at jobs at which they get paid informally, no withholding, no W-2, English as a second language, nothing much that would even make them aware of the income tax... who apply for U.S. citizenship? At which point all taxes need to be paid.
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Re: Why do many people owe the IRS taxes?

Post by Grt2bOutdoors »

Friend was a self employed contractor who got paid lump sum. He was responsible for his own tax withholding and remittances on a regular basis but he traveled often for work and wasn’t paid well. Essentially he spent his tax dollars on living expenses until the IRS caught up with him. Those payments he received were 1099’d and the IRS was very interested in why there was a mismatch between what he reported vs what they had a record of. That’s how he wound up being in major hock to the IRS for back taxes. It got resolved but it took several meetings before that happened.
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Re: Why do many people owe the IRS taxes?

Post by Carefreeap »

Escapevelocity wrote: Fri Jun 18, 2021 10:33 am
Carefreeap wrote: Fri Jun 18, 2021 9:58 am
alfaspider wrote: Fri Jun 18, 2021 9:07 am
simplextableau wrote: Fri Jun 18, 2021 8:48 am He may be referring to those commercials I hear on the radio all the time for services to help people owing back taxes of $10,000 or more settle with the IRS. Honestly, I don't understand it either. Who are these people who fail to pay their taxes and how are there so many?
The primary reason is likely liquidity problems, especially for business owners who may not have tax withheld on their income and/or failed to pay quarterly and couldn't come up with the money to pay up at tax time. This can also happen if you sold an investment where there was no withholding, spent the money, and didn't have it come tax time. Finally, it can also happen from "phantom income" from a partnership interest where income is allocated to you but the partnership has not distributed cash.

Those ads on TV/Radio about back taxes are from "offer in compromise" mills. The IRS has a program called the "offer in compromise" for folks who are unable to pay their tax debts. You fill out an application for a reduced payment amount and payment plan based on income/assets and the IRS will accept/deny the claim. The OIC mill will take a cut of the reduction. They charge a LOT of money for what amounts to filling out a form on your behalf. You are generally much better off going to a competent CPA or attorney who charges a reasonable hourly fee.

A lot of people also rack up a lot of unnecessary tax debts by taking the "ostrich" approach to letters from the IRS. No matter what, the worst thing you can do is ignore letters from the IRS. You may lose out on the right to contest the underlying tax by doing so and/or end up with a much higher bill than if you had negotiated a payment plan up front.
My mom was one of those people. At age 58 she and my dad filed BK and she divorced him after 37 years of marriage. She was a real estate agent and presumably needed some start up costs but she was also a spender. After leaving my dad she moved to the most expensive neighborhood in town but "got an appartment whuch was a really good deal". :oops: From what I recall she didn't pay enough taxes for two years. She got assessed with the 25% under payment penalty plus interest. The original debts probably totalled $20k but by the time she died at age 70 the debt had grown to $40k. :shock: The $200/mth payment plan wasn't even keeping up with the accruing interest. When settling her estate I found a book that talked about the Offer in Compromise and was puzzled why she didn't do it. Having no assets and being self employed would have seemed like a good bargaining position. In the end I found out that there is a statute of limitations on IRS debt of 10 years. Therefore while I was settling the estate (it was complicated because she had managed to buy a condo and a small rental but the estate was upside down by about $400k including the IRS debt) I kept payiing the $200/mth. Four months after she died $15k disappeared off the payment plan statement and a year later $25k disappeared. I just couldn't imagine having that kind of debt hanging over my head.
That's insane. The IRS accepted a payment plan from your Mom that didn't even cover the interest on her debt and then wrote off the principal without even attempting to claim against her estate? No wonder the IRS has such a low collection rate!
They have a policy whereby if you are current on your payment plan they don't file a tax lien. Having a tax lien can negatively affect credit and to some extent employment so it's actually in the IRS' best interest to have you gainfully employed and paying your taxes.

My mom (and her estate) made payments of over $24,000 during those 10 years. Therefore the principal was repaid albeit over 10 years.

If I had chosen to walk away from this mess the IRS would not have had 16 more payments. They would have liened the property that was going into foreclosure and would have been wiped out in the foreclosure. I was able to settle with one of her lenders but that took over six months and after the first 15k dropped off. Seemed smarter to just keep making the remaining payments and not get the IRS any more involved with her estate.
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Re: Why do many people owe the IRS taxes?

Post by fulltilt »

nisiprius wrote: Fri Jun 18, 2021 12:47 pm
fulltilt wrote: Fri Jun 18, 2021 10:43 amI can think of a lot of ways an "average" person could get into a situation where they have not withheld enough for taxes and don't have the money to pay in when it comes time to pay in.
One thought that struck me: what about a person working hard for years at jobs at which they get paid informally, no withholding, no W-2, English as a second language, nothing much that would even make them aware of the income tax... who apply for U.S. citizenship? At which point all taxes need to be paid.
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Re: Why do many people owe the IRS taxes?

Post by Alaric »

AnilG wrote: Thu Jun 17, 2021 11:40 pm Do you prefer to lend money at no interest or pay later? Why would I lend money to IRS at no interest instead of keeping that money invested and pay IRS at the end of the year?
I still find it amazing that three out of every four filers receive a refund after, yes, generously making an interest-free loan to the federal government.

One-third of Americans don’t know whether they’ll get a tax refund or owe the IRS this year

And as the CNBC piece's title indicates, one-third of filers don't even know whether they will be receiving a refund or will owe additional taxes.
Most Americans do indeed get a refund from the IRS after filing their tax returns. In 2020, nearly 170 million people filed tax returns, including traditional non-filers who submitted information to get their economic impact payments. That year, the IRS issued nearly 126 million refunds, accounting for about 74% of all filers.

The average 2020 refund was $2,549, about $321 less than the average 2019 refund of $2,870.
$321 billion in refunds issued. Wow. What could you have done with $2,549 for an additional ~10 months, at least back when interest rates were 2% or more? From a non-debtor perspective maybe it's not such a big deal at least as far on opportunity cost on fixed income. But how many of those filers receiving $2,549 could have been paying off credit card debt, student loans, mortgages, auto loans and other debts at significant interest rates rather than earning 0% on their future refunds?
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Re: Why do many people owe the IRS taxes?

Post by userwithconcern »

So are people here saying that the only tax the IRS is collecting from ordinary individuals is the federal income tax, calculated like shown on page 7 of?:

https://www.irs.gov/pub/irs-pdf/f1040es.pdf
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Re: Why do many people owe the IRS taxes?

Post by FiveK »

userwithconcern wrote: Fri Jun 18, 2021 6:19 pm So are people here saying that the only tax the IRS is collecting from ordinary individuals is the federal income tax, calculated like shown on page 7 of?:

https://www.irs.gov/pub/irs-pdf/f1040es.pdf
HootingSloth gave perhaps the most complete answer in this post. The page you referenced gives an approximate answer. "How approximate?" depends on specific circumstances.

What is your real question?
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Re: Why do many people owe the IRS taxes?

Post by userwithconcern »

FiveK wrote: Fri Jun 18, 2021 6:44 pm
userwithconcern wrote: Fri Jun 18, 2021 6:19 pm So are people here saying that the only tax the IRS is collecting from ordinary individuals is the federal income tax, calculated like shown on page 7 of?:

https://www.irs.gov/pub/irs-pdf/f1040es.pdf
HootingSloth gave perhaps the most complete answer in this post. The page you referenced gives an approximate answer. "How approximate?" depends on specific circumstances.

What is your real question?
Why is that approximate?

The "real" question, which I did ask above, is for me to make sure if there are other taxes that ordinary people may owe the IRS, other than the one calculated according to the table on page 7 above. This is for me to make sure that I do not owe the IRS such taxes.
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Re: Why do many people owe the IRS taxes?

Post by RickBoglehead »

userwithconcern wrote: Fri Jun 18, 2021 8:10 pm
FiveK wrote: Fri Jun 18, 2021 6:44 pm
userwithconcern wrote: Fri Jun 18, 2021 6:19 pm So are people here saying that the only tax the IRS is collecting from ordinary individuals is the federal income tax, calculated like shown on page 7 of?:

https://www.irs.gov/pub/irs-pdf/f1040es.pdf
HootingSloth gave perhaps the most complete answer in this post. The page you referenced gives an approximate answer. "How approximate?" depends on specific circumstances.

What is your real question?
Why is that approximate?

The "real" question, which I did ask above, is for me to make sure if there are other taxes that ordinary people may owe the IRS, other than the one calculated according to the table on page 7 above. This is for me to make sure that I do not owe the IRS such taxes.
There is only one federal income tax, which is paid annually on April 15th.
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Re: Why do many people owe the IRS taxes?

Post by FiveK »

userwithconcern wrote: Fri Jun 18, 2021 8:10 pm Why is that approximate?
Because it doesn't include some of the items HootingSloth noted, but those items might not apply to you.
The "real" question, which I did ask above, is for me to make sure if there are other taxes that ordinary people may owe the IRS, other than the one calculated according to the table on page 7 above. This is for me to make sure that I do not owe the IRS such taxes.
And asking again: Have you filed Form 1040 every year it was required? How many years has that been?

Additionally, if you have filed Form 1040, did you use tax software, or a CPA, or do it yourself, or...?
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Re: Why do many people owe the IRS taxes?

Post by Katietsu »

userwithconcern wrote: Fri Jun 18, 2021 8:10 pm
Why is that approximate?

The "real" question, which I did ask above, is for me to make sure if there are other taxes that ordinary people may owe the IRS, other than the one calculated according to the table on page 7 above. This is for me to make sure that I do not owe the IRS such taxes.
You need to also look at page 8. For instance, the 15.3% self employment tax is on top of the income taxes related to the tables on pg 7. This is one of the big reasons people owe back taxes. The IRS also collects other taxes like estate and gift taxes. But these are not common.
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Re: Why do many people owe the IRS taxes?

Post by userwithconcern »

Katietsu wrote: Fri Jun 18, 2021 8:37 pm
userwithconcern wrote: Fri Jun 18, 2021 8:10 pm
Why is that approximate?

The "real" question, which I did ask above, is for me to make sure if there are other taxes that ordinary people may owe the IRS, other than the one calculated according to the table on page 7 above. This is for me to make sure that I do not owe the IRS such taxes.
You need to also look at page 8. For instance, the 15.3% self employment tax is on top of the income taxes related to the tables on pg 7. This is one of the big reasons people owe back taxes. The IRS also collects other taxes like estate and gift taxes. But these are not common.
I am familiar with the self-employment taxes. However, for people with wage and investment income only, that is not applicable, right? So in that case, it would just be page 7?
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Re: Why do many people owe the IRS taxes?

Post by montanagirl »

stan1 wrote: Fri Jun 18, 2021 10:55 am Small business owners who don't pay enough estimated taxes (and who don't properly withhold FICA/Medicare).

People who have cash income and don't have withholding.
This. 1099 workers who weren't prepared for the record keeping or didn't realize they had to pay any SE tax, let it go, then hide their head in the sand.

See if a lot with construction trades.
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Re: Why do many people owe the IRS taxes?

Post by HootingSloth »

userwithconcern wrote: Sat Jun 19, 2021 1:19 pm
Katietsu wrote: Fri Jun 18, 2021 8:37 pm
userwithconcern wrote: Fri Jun 18, 2021 8:10 pm
Why is that approximate?

The "real" question, which I did ask above, is for me to make sure if there are other taxes that ordinary people may owe the IRS, other than the one calculated according to the table on page 7 above. This is for me to make sure that I do not owe the IRS such taxes.
You need to also look at page 8. For instance, the 15.3% self employment tax is on top of the income taxes related to the tables on pg 7. This is one of the big reasons people owe back taxes. The IRS also collects other taxes like estate and gift taxes. But these are not common.
I am familiar with the self-employment taxes. However, for people with wage and investment income only, that is not applicable, right? So in that case, it would just be page 7?
Hopefully you have been filing a tax return each year? You determine your tax liability by filling out the Form 1040, along with other forms as per the instructions, and the various associated schedules. Most people do this by using tax software like TurboTax. The chart on page 7 is one very small piece in this process, but if you are using the tax software it will be automated for you, and you will not even notice it happening. A lot more is usually going on under the surface than just that chart. If you do not use software or a CPA, then you have to read and follow all of the instructions carefully, but I would not recommend that approach if you are unfamiliar with taxes.

If all you do during the year is work as an employee and invest in stocks and bonds, then completing and filing this income tax return each year should have you covered. One other place "ordinary" people (under some definition of ordinary) sometimes get tripped up is not realizing that they are actually an employer of certain household workers. You can look up "nanny tax" to learn more.
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Re: Why do many people owe the IRS taxes?

Post by tj »

Easy. They get audited and already spent the money that should have been given to the IRS years ago.
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