Taxes must be paid on income you earn or receive during the year, either through withholding or estimated tax payments. Note, you may be required to make both federal and state estimated tax payments. The following discussion centers around federal tax law; a separate analysis would have to be conducted for each state in which the taxpayer has income.
Are You Supposed to Make Estimated Tax Payments?
How do you know whether you are supposed to make estimated tax payments? If the amount of income tax withheld from your salary or retirement accounts is not enough, or if you receive other types of income such as interest, dividends, alimony, self-employment income, or capital gains income, you may have to make estimated tax payments.
If you have these types of income, or if your withholding is insufficient to cover your tax bill, then you should consider making estimated payments. Failure to pay enough tax throughout the year, either through withholding or by making estimated tax payments, will mean you have to pay a penalty for underpayment of tax come April.
Determining Estimated Tax Payments
To determine your estimated tax payments, you must estimate your expected adjusted gross income, taxable income, deductions, and credits for the year. In determining your estimated tax for the current year it’s helpful to use your prior year’s tax return as a starting point and then make adjustments based on whether you believe you will earn more or less in the current year. Adjustments should also be made for changes in tax law.
What are Safe Harbor Payments?
The simplest way to ensure you pay the correct amount is to make the “safe harbor payments”. The safe harbor payments will ensure you are not penalized for underpayment of tax. The safe harbor amounts are as follows:
- If your prior year Adjusted Gross Income was $150,000 or less, then you can avoid a penalty if you pay either 90% of this year’s income tax liability or 100% of your income tax liability from the previous year.
- If your prior year’s Adjusted Gross Income was greater than $150,000, then you must pay either 90% of this year’s income tax liability or 110% of last year’s income tax liability.
When are Estimated Tax Payments Due?
Your estimated tax payments are due on April 15, June 15, September 15 and January 15 of the following year (if any of these days fall on a holiday or weekend then payment is due the following business day).
If you have a tax refund when you file in April, you can elect on your return to have part or all of it applied to pay your first quarter estimated payment. This could be an easy way to get in the habit of making quarterly estimated payments and saves you the trouble of having to remember to make that first payment.
Consider Recent Changes in Federal Tax Law
You should always make adjustments to your estimated tax payments both for changes in your earning situation and for recent changes in the tax law.
The recently signed tax bill includes many changes which for most taxpayers mean that the 2018 tax year and tax years thereafter will be drastically different from the 2017 tax year.
In fact, the tax bill represents the most dramatic changes in the U.S. Tax Code in more than 30 years.
No Surprises Wanted at Tax Time
The current changes in federal tax law contain many surprises, both good and bad. As an example, many taxpayers will now see themselves taking the standard deduction versus itemizing their deductions because the standard deduction has been raised from $6,350 in 2017 to $12,000 in 2018 for individuals and from $12,700 in 2017 to $24,000 in 2018 for married couples.
However, the personal exemption has been eliminated. Despite assurances in the popular press, you should not assume that your taxes are automatically going down for tax years after the 2017 tax year.
Seek Help to Determine if You Need to Make Estimated Tax Payments
As always, you should seek help from a tax professional to determine if your unique situation warrants you to make quarterly estimated tax payments. Your tax professional will also be able to determine your quarterly tax payment amounts and better advise you on how to take advantage of the recent changes in tax laws. The simple rule of thumb is to err on the side of the IRS – it’s better to get a refund than owe tax at a later date.
For questions please contact one of our tax lawyers at The Wright Firm, LLP (972) 353-4600, or visit us at our website. E-mail may also be addressed to our tax partner Attorney Paul F. Wright, a Board Certified Texas Estate Planning and Probate Attorney and CPA.