3 Safe Harbor Rules for Estimated Taxes

Paying income taxes every year is a necessary evil, but it can be even more unpleasant if you fail to pay your taxes on time. The IRS may assess an estimated tax penalty on top of the regular income tax you'll owe.


This often causes problems for self-employed individuals who don't have tax regularly withheld from paychecks. However, with some timely planning, you can avoid any adverse tax consequences.


How to avoid estimated tax issues


Generally, you may meet your income tax obligations during the year through any combination of income tax withholding and quarterly installment payments. The due dates for the installments are April 15, June 15, Sept. 15 and Jan. 15 of the following year (the deadline is postponed to the next business day if it falls on a weekend or federal holiday). That means the installment for the fourth quarter of 2017 is due Jan. 16, 2018.


If you don't pay your taxes on time, you may be hit with an underpayment penalty. Fortunately, you can avoid a penalty for the 2018 tax year through any one of these safe-harbor rules approved by the IRS:

• Pay at least 90 percent of your 2017 tax liability. This requires you to make a reasonable estimate for what you will owe for the year.

• Pay at least 100 percent of your 2016 tax liability, or 110 percent if your adjusted gross income (AGI) exceeded $150,000. This is usually the easiest method for avoiding a penalty because you already know the tax figures for 2016.

• Pay at least 90 percent of the current year's "annualized income." This more complex calculation often works well for taxpayers who receive most of their income seasonally. We can help you determine this figure when you call our office.

​Of course, you don't have to pay the bare minimum if it suits your purposes. For instance, you might overpay tax during the year to produce a bigger refund at tax return time. In any event, pay enough to avoid an unnecessary tax penalty.

"Tax Tips" are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.   
 
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Monarch Accounting Group, Inc
145 Tower Drive, Suite 4
Burr Ridge, IL 60527
Phone (630) 320-3720