The title of this article is the IRS’s catchy new slogan launched at the end of October to remind taxpayers that income tax should be paid in throughout any given tax year; it’s not due just when the tax returns are filed. While the slogan may be the brainchild of a marketing whiz, the concept is rooted in tax law and penalty avoidance.
IRS statistics have shown a 40% increase in taxpayers who owed an underpayment penalty in the years from 2010 to 2015. The underpayment penalty applies when the total of withholding and estimated payments is less than:
- 90% of the tax due on the return being filed
- 100% / 110% of the tax shown on the prior-year return (the higher limit applies to federal tax when AGI is over $150,000 for married filing joint filers or $100,000 for single individuals)
Note that no underpayment penalty applies when the taxpayer’s shortfall is less than $1,000 or if the taxpayer had no liability on his or her prior year’s return.
The amounts above are called the “safe harbor” for federal estimated tax payments. If this threshold isn’t met through withholding, a taxpayer must make quarterly estimated payments, as taxes are “pay-as-you-go.” State and local tax estimates are usually calculated as 100% of the prior year.
The first place to start when attempting to estimate your current year’s tax liability is most often with your prior-year tax return. Of course, your total tax owed will fluctuate with various life events and changes in income, but, this is a good starting point. Your current year total tax bill can be projected using the prior year as a base from which you’ll adjust based on known changes (e.g., birth of a child, started a higher-paying job, etc.).
Once your estimated current year tax is known, you can change your Form W-4 withholding (if you’re an employee) and/or make quarterly payments.
Income earned during the following periods has an estimated tax payment due as shown below:
- January 1 to March – April 15
- April 1 to May 31 – June 15
- June 1 to August 31 – September 15
- September 1 to December 31 – January 15 of the following year
It’s important to note that there may be changes in the deductibility of state and local tax payments on the horizon. The House bill proposed recently puts forth a plan to end the Schedule A deduction related to all state and local income taxes paid (along with eliminating the alternative state sales tax deduction). If such a change in deductions is passed into law for the 2018 tax year, generally, it would make much more sense to make these estimated payments prior to the end of calendar 2017—both from late payment penalty avoidance and from a deductibility perspective.
If you would like to discuss estimated tax projections, please contact us. We can assist with tax projections and estimated tax calculations.