Money Maven: No escape from paying taxes

By Sheryl Rowling

Sheryl Rowling

SAN DIEGO — Q: Do I have to pay my taxes throughout the year? Can I just pay on April 15th?

A: Unfortunately, the IRS requires you to pay your taxes throughout the year. If you wait until April 15th, you might get hit with penalties. In order to avoid penalties, you must pay in at least 90% of your current year’s tax during the year. You can do this by withholding at least that much from your paycheck or by paying quarterly payments. The quarterly payments must each be at least 1/4 of 90% of the current year’s tax. The payments are due on April 15th, June 15th, September 15th and January 15th. For example, say your 2017 tax will be $10,000. You must pay in 90% during the year. So, you must withhold $9,000 or pay quarterly payments of $2,250 each.

Q: I think my income is going to be higher than usual this year. Do I have to pay all of the taxes in advance?
A: No. You can avoid a penalty by paying at least what your taxes were last year. Let’s say your 2017 tax ends up being $20,000. In 2016, your tax was $8,000. If you have $8,000 of withholding or pay quarterly payments of $2,000 each, the IRS will not charge you a penalty – even though you will owe another $12,000 on April 15th! This break works only if your prior year’s “adjusted gross income” wasn’t more than $150,000 ($75,000 if you’re single). If your AGI was higher than that, your payments must be based on 110% of last year’s tax.

Q: I have my own business. I can’t predict what my tax liability will be for this year. I don’t want to pay based on last year because I had an unusually profitable year last year. What can I do?
A: You can pay quarterly taxes based on your “annualized income.” Figure out what you have earned year-to-date through the end of the month prior to each quarterly payment date. Annualize that income over twelve months and calculate the tax. Then pay the applicable percentage for each payment. For example, say you earned $10,000 through March 31, 2017. If you divide $10,000 by 3 months and multiply by 12 months, your annualized income is $40,000. Assume that the tax on this amount is $7,000. By April 15th, you would need to pay 1/4 of 90% of $7,000, or $1,575. By annualizing your income, you can be safe from penalties even if your income is earned unevenly during the year.

Q: What if I don’t pay enough in during the year? How much is the penalty?
A: The penalty is calculated like interest on the underpaid amount. The interest rate is based on current market rates. The penalty rate for the first quarter of 2017 is 4%.

Q: I didn’t save enough money to pay my tax due on my 2016 tax return. Can I extend my tax return and delay paying the tax?

A: Extending your tax return does not extend the time for paying your tax. If you haven’t paid in at least 90% of your tax liability, your extension is not valid. So, you will be hit with penalties for late payment and late filing. This can add up to 5% per month in penalties plus interest! If you file your tax return by April 15th and ask for an installment plan, you will only pay interest. If you can’t file your tax return by April 15th and you can’t afford to pay the tax due, you must estimate the tax due accurately on your extension request. Then, as long as you file your tax return by August 15th, you will only be hit with a penalty of 1/2 % per month (rather than 5% per month) and interest.

Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via [email protected]

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