ESTIMATED TAXES

The filing and paying deadline for the 2020 Form 1040 (and 1040-SR) has been extended to May 17th, but as of this writing the 1st Quarter 2021 federal estimated tax payment is still due April 15th.

But, according to the IRS (see here) -

“To the extent an overpayment of the 2020 tax exists as of April 15, 2021 (because payments made on or before April 15, 2021, exceed the 2020 tax liability), and the taxpayer makes a valid election to apply the overpayment to 2021 estimated tax, the overpayment would be applied as of April 15, 2021, whether the 2020 return is filed on April 15, May 17, or October 15, 2021.”

So any amount of your overpayment you apply to 2021 estimated tax on your 2020 tax return, regardless of when the return is filed, is treated as having been received by the IRS by April 15, 2021 – assuming that all the tax payments reported on the tax return were made before April 15, 2021. 

So, if you file an extension with a payment of anticipated tax due and when you finally prepare your return you are entitled to a refund this may not apply.  But if all the tax payments reported on your return were made via withholding and/or timely paid estimated taxes you are OK.

TTFN

 

IRS UPDATES

Here is the latest news on the stimulus payments and COVID-19 federal tax relief -

* If you don’t file a tax return due to low income and you do not receive Social Security or Railroad Retirement benefits you can use the new "Non-Filers: Enter Your Payment Info Here" application at the IRS website to provide simple information so you can get your payment.

Go to https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here.

* The IRS will also be introducing a "Get My Payment" application at the website in mid-April to check your payment status, confirm your payment type (direct deposit or check) and enter your bank account information for direct deposit if the IRS does not have this information from your tax return.  I will let you know here when this application is available.   

* Per recent IRS Notice 2020-23, the June 15 deadline for federal estimated tax payments is postponed to July 15, and the deadline for filing an amended 2016 federal tax return to claim a refund, normally April15, is extended to July 15.

TTFN

THIS JUST IN – PENALTY RELIEF FOR UNDERPAYMENT OF ESTIMATED TAXES

This just in – “IRS waives penalty for many whose tax withholding and estimated tax paymentsfell short in 2018”.

Here is what the IRS had to say in yesterday’s IR-2019-03 (highlight is mine) -

“The Internal Revenue Service announced today that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

The IRS is generally waiving the penalty for any taxpayer who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty.”

This move is in response to the fact that the new withholding tables for 2018, created to reflect the changes made by the GOP Tax Act, were, as I suspected, a bit too "liberal", to make taxpayers think the Act was putting more money in their pockets than it actually was, and the fact that most taxpayers did not properly revise their withholding to properly cover the substantial changes made to deductions and the elimination of the personal exemption deduction.

When I first saw the headline, I was excited.  But not after reading the 2^nd paragraph.  While reducing the penalty threshold from 90% to 85% is a good and welcomed action, and will provide some relief to applicable taxpayers, some of my clients included, it is not a big deal.  I would have liked more.

Taxpayers still have two other ways to avoid or reduce penalties for underpayment of federal estimated taxes –

* if the 2018 payments, via withholding and/or estimated payments, is 100% of the 2017 tax liability (110% if the 2017 AGI was over $150,000 or $75,000 if Married Filing Separately), and

* “annualizing” income and deductions for the year to determine the specific tax liability for each of the 4 estimated tax periods and applying actual payments made for each period.

TTFN

LEARNING FROM YOUR 2012 FORM 1040

Did you owe too much, or get too large of a refund, this year?  You should review and perhaps change your withholding at work.

Uncle Sam wants you to pay in at least 90% of your current tax liability, or 100% of your prior year’s liability (110% if that year’s AGI was over $150,000), paid in during the year via either withholding or quarterly estimated tax payments.

If your 2012 tax return had a balance due of more than 10% of your total tax liability, and this was not the result of a special non-recurring item, you should have more tax paid in during the year. 

In my opinion, increasing withholding is better than making quarterly estimated tax payments.  It is certainly much easier – and less painful.  You do not have to worry about forgetting to make the payment, or not having enough cash on hand to cover the payment when it becomes due. 

The penalty for underpayment of estimated tax is calculated on a quarterly basis.  In making the calculation income tax withholding is considered to be paid in evenly throughout the year.  So additional withholding later in the year will be applied evenly to the entire year.  Because of this, increasing your withholding can be “more better” than starting to make estimated tax payments later in the year.

If you elect to make quarterly estimated tax payments you can use the federal EFTPS system to pre-schedule your payments to automatically come out of your bank account so you do not forget to make them on time.

In the past when a client got too big a refund I would scold him/her and say that he/she was making an interest free loan to the government.

While this is still true, I do not scold any more, considering the pitiful amount of interest being paid on savings account today. 

Many taxpayers use excess withholding as a kind of “forced savings”, and count on a large refund to, for example, fund their vacation.  They know full well that if they had an extra $100 or more in their pocket each week they would spend it.  I do actually support this concept. 

However, if you have large credit card debt you should use the $100 or more of overwithholding each week to pay down this debt.  Because of the usurious interest rates charged by many cards, doing so will provided a substantial “return on investment”.  Similarly, you can use some of the overwithholding to make extra principal payments on your mortgage and cut years off the term.

Many states allow taxpayers to file separate state W-4 forms to have different withholding than for the federal tax.  If you owed Sam this year, but got a state tax refund you should think about increasing your federal withholding and reducing your state withholding so it is “revenue neutral” but applies withholding more appropriately.   

TTFN

A YEAR-END TAX PLANNING RERUN - AVOIDING AN UNDERPAYMENT PENALTY

{Here is a “rerun” of a post on a year-end tax planning technique to avoid being victim of the penalty for underpayment of estimated tax.)

The Internal Revenue Service wants you to have 90% of your current year’s tax liability, or either 100% or 110% of the prior year’s tax liability (depending on the amount of your prior year’s Adjusted Gross Income), paid in during the year via withholding or quarterly estimated tax payments.  If you owe too much when your file your 1040 you could be hit with a penalty for “underpayment of estimated tax”.

There is a special year-end strategy you can use to avoid such a penalty.

First some background:

Timing is important when it comes to paying your taxes.  The underpayment penalty is calculated based on quarterly payments.

Withholding is assumed to be made evenly throughout the year.  Even if you have all your federal income tax withheld in December it is treated as being paid in equally over the 4 quarters for purposes of determining underpayment.  If you had $10,000 withheld in December it is assumed that $2,500 was paid in for each of the 4 quarters.

Estimated taxes are applied in the calculation when actually paid. If you discover you need to pay $10,000 in estimated tax for the year and you make the payment in December you will still be penalized for underpayment for the first 3 quarters.

There is an exception.  If the reason you will owe the additional $10,000 is because you sold a vacation home in November for a substantial gain you can make the payment as late as mid-January and avoid the penalty by "annualizing” your income.

Now for the strategy:

Suppose in the course of preparing your "preliminary" 2012 tax return you discover you did not have enough federal income tax withheld from your paycheck and you will owe Uncle Sam at least another $10,000 because of additional income received at various times during the year.  Instead of making a 4th quarter estimated tax payment, and risking a penalty for underpayment of estimated taxes, you can –

(1)  Take a $10,000 distribution from an IRA in December and elect to have 100% of the distribution ($10,000) withheld for federal income taxes, and

(2)  Within 60 days deposit $10,000 to another IRA, or back into the same IRA (you shouldn't wait the full 60 days – do the rollover ASAP). Make sure that you rollover the $10,000 on time - or else you will be hit with additional tax and another, more expensive, penalty!

Because federal income tax withholding, from whatever source, is assumed to be made evenly throughout the year, regardless of the date of the actual withholding, your $10,000 will be treated as 4 equal quarterly payments of $2,500 and you will avoid the penalty for underpayment of estimated tax.

This strategy may also work for state income tax underwithholding.

TTFN

AVOIDING AN UNDERPAYMENT PENALTY

The Internal Revenue Service wants you to have 90% of your current year’s tax liability, or either 100% or 110% of the prior year’s tax liability (depending on the amount of your prior year’s Adjusted Gross Income), paid in during the year via withholding or quarterly estimated tax payments.  If you owe too much when your file your 1040 you could be hit with a penalty for “underpayment of estimated tax”.

There is a special year-end strategy you can use to avoid such a penalty.

First some background:

Timing is important when it comes to paying your taxes.  The underpayment penalty is calculated based on quarterly payments.

Withholding is assumed to be made evenly throughout the year.  Even if you have all your federal income tax withheld in December it is treated as being paid in equally over the 4 quarters for purposes of determining underpayment.  If you had $10,000 withheld in December it is assumed that $2,500 was paid in for each of the 4 quarters.

Estimated taxes are applied in the calculation when actually paid. If you discover you need to pay $10,000 in estimated tax for the year and you make the payment in December you will still be penalized for underpayment for the first 3 quarters.

There is an exception.  If the reason you will owe the additional $10,000 is because you sold a vacation home in November for a substantial gain you can make the payment as late as mid-January and avoid the penalty by "annualizing” your income.

Now for the strategy:

Suppose in the course of preparing your "preliminary" 2011 tax return (see my earlier article on Year-End Tax Planning) you discover you did not have enough federal income tax withheld from your paycheck and you will owe Uncle Sam at least another $10,000 because of additional income received at various times during the year.  Instead of making a 4th quarter estimated tax payment, and risking a penalty for underpayment of estimated taxes, you can –

(1) Take a $10,000 distribution from an IRA in December and elect to have 100% of the distribution ($10,000) withheld for federal income taxes, and

(2) Within 60 days deposit $10,000 to another IRA, or back into the same IRA (you shouldn't wait the full 60 days – do the rollover ASAP). Make sure that you rollover the $10,000 on time - or else you will be hit with additional tax and another, more expensive, penalty!

Because federal income tax withholding, from whatever source, is assumed to be made evenly throughout the year, regardless of the date of the actual withholding, your $10,000 will be treated as 4 equal quarterly payments of $2,500 and you will avoid the penalty for underpayment of estimated tax.

This strategy may also work for state income tax underwithholding.

TTFN

FIRST TAX CARNIVAL OF THE NEW YEAR

Better late than never! “Tax Carnival #28: Welcome to Tax Filing Season 2008” is now up over at Kay Bell’s DON’T MESS WITH TAXES blog.

I am represented twice in the first Tax Carnival of the new year. My post on “Three Cheers for the Home Office Deduction!” from THE FLACH REPORT and “What You Need to Know Before Donating a Vehicle to Charity” from right here at THE WANDERING TAX PRO are included. Thanks, Kay, for allowing me to “double dip”.

I noticed some new participants this time around, with some good advice and information. SINGLE GUY MONEY warns about the tax refund debit cards provided by our old friends Henry and Richard. While free to receive, SGM points out that, as we would expect from H+R, there are lots of hidden fees when you use the card. My advice has always been forget about the free tax refund debit card – stay away from H+R Block altogether.

Speaking of DON’T MESS WITH TAXES, Kay Bell reminds us that today, January 15th, is the due date of the fourth (4th) quarter 2007 federal and state estimated tax payment.

Kay’s post also provides the due dates for 2008 estimated tax payments.

TTFN