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Investment Planning |
Wise Withholding
It’s no fun to write a big check to the IRS. However, if you don’t owe penalties, sending checks to the tax authorities with your tax returns is a pretty good strategy. This Tax Tip will explain alternative methods for paying your taxes.
To avoid underpayment penalties and interest, you must prepay either 90% of your current year tax or a sum equal to 110% of your prior-year tax liability. However, if your prior-year AGI was $150,000 or less, you may prepay only 100% of your prior-year tax bill to be exempt. If you meet these rules, no penalty is due, no matter how much you end up owing the IRS when you file your return. Under a special rule, withheld income taxes are treated as if you paid them evenly during the year. So, if you find you’re going to be short, withholding extra tax late in the year can make up for any past underpayments. An easy way to do this is to have federal and state income tax withheld from your paycheck, retirement plan distributions, pensions, and/or Social Security benefits.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.