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Don’t Shortchange the IRS

The IRS reports that about ten million taxpayers were subject to a penalty on underpaying estimated taxes in 2015.  In general, taxpayers must pay in at least 90% of the taxes owed for the year, either through withholding from earnings or timely quarterly estimated payments.  This may be a difficult number to calculate, especially for those who work numerous part-time jobs or are freelancers.  A safe harbor allows taxpayers to avoid the penalty by paying in 100% of the prior year’s tax liability (110% for taxpayers with AGI in excess of $150,000 for the prior year).

It’s a good idea to check with your tax adviser prior to year’s end to determine if you have paid in enough for 2017.  If you find that you might be subject to the penalty, you may be able to increase withholding from wages, which is considered to be ratably spread over the year.  Estimated payments, on the other hand, apply to income from that quarter, so paying more in one quarter does not make up for a deficiency in a prior quarter.

While trying to avoid underpaying taxes, it’s smart not to pay too much.  Granted, any overpayment will result in a refund next year, but in the meantime, you’ve given the IRS an interest-free loan.


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