Paying income taxes every year is a necessary evil, but it can be even more unpleasant if you fail to pay your taxes on time. The IRS may assess an estimated tax penalty on top of the regular income tax you'll owe.
This often causes problems for self-employed individuals who don't have tax regularly withheld from paychecks. However, with some timely planning, you can avoid any adverse tax consequences.
How to avoid estimated tax issues
Generally, you may meet your income tax obligations during the year through any combination of income tax withholding and quarterly installment payments. The due dates for the installments are April 15, June 15, Sept. 15 and Jan. 15 of the following year (the deadline is postponed to the next business day if it falls on a weekend or federal holiday). That means the installment for the fourth quarter of 2017 is due Jan. 16, 2018.
If you don't pay your taxes on time, you may be hit with an underpayment penalty. Fortunately, you can avoid a penalty for the 2018 tax year through any one of these safe-harbor rules approved by the IRS:
- Pay at least 90 percent of your 2017 tax liability. This requires you to make a reasonable estimate for what you will owe for the year.
- Pay at least 100 percent of your 2016 tax liability, or 110 percent if your adjusted gross income (AGI) exceeded $150,000. This is usually the easiest method for avoiding a penalty because you already know the tax figures for 2016.
- Pay at least 90 percent of the current year's "annualized income." This more complex calculation often works well for taxpayers who receive most of their income seasonally. We can help you determine this figure when you call our office.
Of course, you don't have to pay the bare minimum if it suits your purposes. For instance, you might overpay tax during the year to produce a bigger refund at tax return time. In any event, pay enough to avoid an unnecessary tax penalty.
© MC 2018