Mid-year Review of Estimated Taxes
It's not a major disaster if you owed some money when you filed
your return – after all, you'd rather have the use of the funds for as long as
possible. But what you want to avoid is having to pay the IRS a penalty for underpaying
your taxes during the year. If you owe the estimated tax underpayment penalty,
which is nondeductible, you're in effect paying the IRS interest for part of
the money you should have prepaid during the year for taxes, but didn't. On the
other hand, if you got a big refund on last year's return, you made an
interest-free loan to the government – something you may want to avoid this
year. If that happened, you should consider reducing the amount of withholding
taken from your salary and/or the amount of estimated tax payments you make.
Here are some pointers to keep you on even keel when it comes to
estimated taxes.
Basic rules.
There is no estimated tax underpayment penalty for the 2019 tax year if the
total tax on your return reduced by withholding (but not by estimated tax
payments) is less than $1,000. If the amount owed on an individual income tax
return comes to $1,000 or more after subtracting withheld tax, the estimated
tax underpayment penalty generally won't apply if your "required annual payment"
– i.e., the amount that must be prepaid during the year in the form of withheld
tax and estimated tax payments – equals at least the smaller of two amounts:
(1) 90% of your tax bill for 2019, or
(2) 100% of your tax bill for 2018.
For example, let's suppose your tax bill for 2018 was $12,000,
and your tax bill for 2019 will come to $15,000 (90% of which is $13,500). In
this case, you must prepay at least $12,000 of your tax bill during 2018 to
avoid the underpayment penalty. On the other hand, if the tax you will owe for
2019 will only be $10,000, you will have to make timely estimated tax payment
of only $9,000 for 2018 to avoid the penalty.
A tougher rule applies if your adjusted gross income for 2018
exceeded $150,000 ($75,000 for married persons filing a separate return).
During 2019, to avoid the underpayment penalty, you must prepay the smaller of
(1) 90% of the tax for 2019, or (2) 110% of the tax for 2018.
Note that the IRS can waive an underpayment penalty if you
didn't make the payment because of a casualty, disaster, or other unusual
circumstance, and it would be inequitable to impose the penalty. The penalty
also can be waived for reasonable cause during the first two years after you
retire (after reaching age 62) or become disabled.
It's a pay-as-you-go
system. In general, one-quarter of your required annual
payment must be paid by April 15, 2019, June 17, 2019, September 16, 2019, and
January 15, 2020. Keep in mind that tax withheld from your salary is treated as
an estimated tax payment, and that an equal part of withheld tax generally is
treated as paid on each installment date.
You may be able to make smaller payments under the annualized
income method, which is useful to people whose income flow is not uniform over
the year, perhaps because of a seasonal business. You may also want to use the
annualized income method if a significant portion of your income comes from
capital gains on the sale of securities which you sell at various times during
the year.
Time for a checkup.
Although you now know what your 2018 tax bill came to, you probably don't know
what your 2019 tax will be. While it can't be predicted with absolute
certainty, we can project what your 2019 tax will be based on your financial
picture thus far, as well as on events you anticipate will occur and
transactions you anticipate finalizing in the balance of this year. It would be
a good idea for us to get together well in advance of the next estimated tax
installment to see how your payments are tracking and make any necessary
adjustments to your wage withholding and/or estimated tax payments. Keep in
mind that our review of your situation may discover that you're withholding too
much rather than too little.
