Estimated tax payments

Mid-year review

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Melinda Nelson, CPA

Your estimated tax payments are due every quarter. Maybe you skip these and opt instead to pay the underpayment penalty. However, you may want to consider changing your strategy if this is the case for you. Here’s a refresher about estimated tax payments and some changes you need to know about.

Interest rates

On January 1, the IRS increased its interest rate to 6% – the highest since 2008, and just three years ago, the rate was half this, or 3%. There’s good news, though. The interest rate will drop to 5% on July 1. However, opting to pay the underpayment penalty will still likely cost you more money than any time in the recent past.

What are estimated tax payments?

Estimated tax payments are made to pay tax on income that is not subject to withholding, such as earnings from self-employment, interest, dividends, rents and alimony. You also need to make estimated tax payments if you do not withhold tax from other sources of taxable income. Basically, you’re paying 25% of your total estimated annual tax due (required annual payment) four times a year:

  • April 15
  • June 15
  • September 15
  • January 15

The required annual payment for most individual taxpayers is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year.

If you’re a high-income earner, you may have to meet a more rigorous requirement. If your adjusted gross income is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year return or 110% of the tax shown on the previous year’s return.

If your income ebbs and flows over the year – maybe because of a seasonal business – you may be able to make smaller payments under the annualized income method. For example, you operate a business in a resort area during June, July and August. No estimated payment is required before September 15. This method is also helpful if a large portion of your income comes from capital gains on the sale of securities, which you sell at various times during the year.

Underpayment penalty

The underpayment penalty is calculated multiplying the IRS interest rate on overdue tax (currently 6%), times the amount of the underpayment (tax less withholdings) for the period (see the dates above). The underpayment penalty calculation is made on Form 2210. Worksheets available in IRS Publication 505 can help you understand if you should be making estimated tax payments.

There are situations where the underpayment penalty may not apply to you, including these two:

  • If the total tax shown on your return is less than $1,000 after subtracting withholding tax paid.
  • If you were a U.S. citizen or resident for the entire previous year, and you had no tax liability for that year.

Schedule an appointment with Melinda Nelson

The IRS may also waive the penalty if you didn’t pay due to casualty (like an accident or fire), disaster or other unusual circumstances, or for reasonable cause during the first two years after you retire or become disabled.

Talk to your CPA

You know what your 2018 tax bill came to, but you probably don’t quite know what you may owe for 2019. While it can’t be predicted with absolute certainty, your CPA can project your 2019 tax bill based on your financial picture so far as well as events and transactions you anticipate happening later this year. So, be sure to reach out to your Henry+Horne tax advisor for help.

Melinda Nelson, CPA, Partner, specializes in tax planning and compliance involving closely held businesses and their owners as well as estate, gift + trust taxation. You can reach Melinda at (480) 839-4900 or MelindaN@hhcpa.com.