3 Strategies for handling estimated tax payments

From the Warwick Bookkeeping experts at Gentile Stephen T CPA.

In today’s economy, many individuals are self-employed. Others generate income from interest, rent or dividends. If these circumstances sound familiar, you might be at risk of penalties if you don’t pay enough tax during the year through estimated tax payments and withholding. Here are three strategies to help avoid underpayment penalties:

1. Know the minimum payment rules. For you to avoid penalties, your estimated payments and withholding must equal at least:
*90% of your tax liability for the year
*110% of your tax for the previous year, or
*100% of your tax for the previous year if your adjusted gross income for the previous year *was $150,000 or less ($75,000 or less if married filing separately).

2. Use the annualized income installment method. This method often benefits taxpayers who have large variability in income by month due to bonuses, investment gains and losses, or seasonal income – especially if its skewed toward year end. Annualizing calculates the tax due based on income gains, losses and deductions through each “quarterly” estimated tax period.

3. Estimate your tax liability and increase withholding. If, as year-end approaches, you determine you’ve underpaid, consider having the tax shortfall withheld from your salary or year-end bonus by December 31. Because withholding is considered to have been paid ratably throughout the year, this is often a better strategy than making up the difference with an increased quarterly tax payment, which may trigger penalties for earlier quarters. Finally, beware that you also could incur interest and penalties if you’re subject to the additional 0.9%. Medicare tax and it isn’t withheld from your pay and you don’t make sufficient estimated tax payments. Please contact us for help with this tricky tax task.

Gentile Stephen T CPA
109 Airport Rd, Warwick, RI 02889
(401) 739-6110

Financial Planning

  • Families with young children can save for college with an account established under the Uniform Transfers to Minors Act. A child’s investment account can potentially earn up to $2,100 annually without incurring any tax liability.
  • If the investment account earns higher amounts of income, the “kiddie tax” may apply, subjecting the income from the account over $2,100 to tax at the parents’ top marginal rate. The kiddie tax may apply to children 18 and older if their earned income does not exceed one-half of their support for the year.
  • The annual gift exclusion can be used for parents to gift as much as $14,000 annually ($28,000 if two parents split gifts). In most states, the property in the investment account must be distributed to the child when he or she reaches age 21.
  • Another college savings vehicle, a Sec. 529 plan, exempts earnings from investments in the plan from current taxation, and distributions from the plan that are used to pay the beneficiary’s qualified higher education expenses are also not taxed. Investing through a Sec. 529 plan may yield a more favorable financial aid calculation, since assets in a plan are counted as owned by the parents.

If you need any additional information on the information contained in this article or if you have any other questions please feel free to contact out offices, click here to visit our website.

 

Gentile Stephen T CPA
109 Airport Rd
Warwick, RI 02889
(401) 739-6110

 

Ford, Allen Ph.D & Wiebe, Zac. “Financing for college with the Uniform Transfers to Minors Act.” Journal of Accountancy July 2015: Page 58. Print.