Carol McAtee & Associates, CPAs
Never too Early to Start Thinking About Filing the Next Tax Return
We are now in the last quarter of 2015, and most of us have filed our 2014 tax return, or will be doing so by October 15th. And, now is really the time to begin getting ready for the next return.
Proper planning is important and positioning yourself to pay the smallest possible tax is an ongoing process. If you owed money on your 2014 return, then we should be discussing what caused the shortage. If your withholding wasn’t sufficient on your salary, IRA, pension or social security distributions, then we should get together to structure how the shortage can be eliminated or minimized for 2015.
Because our U.S. tax system is based on a marginal bracket structure and dependent on filing status, the last dollars included in your gross income can be taxed at a much higher rate than your effective tax rate. When you have federal income tax withheld, the amount is based on the number of exemptions you provided to your employer when you filled out your W-4 form or the dollar amount or percentage of the distribution submitted to the IRA or pension plan administrator. Maybe the number of exemptions that you claimed was too many. The more exemptions you claim on Form W-4 lessens the federal tax withheld which gives you a smaller tax credit against the total tax liability. The other item to keep in mind is that your withholding with your employer assumes that this is the only source of income that you have for tax filing purposes. In addition, when both spouses have W-2 income, the other employer’s withholding isn’t designed to take that into account. If you have other sources includible in your gross income such as interest, dividends, capital gains, gambling winnings, prize winnings, rental income, self-employment income, etc., then you could be underpaid when it comes time to file your 2015 tax return in April 2016. If you are receiving IRA distributions, pension distributions and/or social security benefits and do not have any federal income tax withheld or have less than your marginal bracket withheld, then you may be cutting a check when you file that return and that check could include a penalty for the underpayment of estimated taxes.
In order to avoid the payment of a penalty for under withholding, the law requires that taxpayers pay in a minimum amount of tax in the form of withholding and/or estimated payments by January 15 of the year following the close of the tax year. For the 2015 tax year this is January 15, 2016. The rule provides that in order for the taxpayer to avoid any penalty they must pay in the lesser of 100% of the prior year tax (2014 tax) or 90% of the current year tax (2015 tax).
As an example, if your total tax liability in 2014 was $10,000, then you must have $10,000 paid in via withholding and/or quarterly estimated payments. If your 2015 tax is going to be $12,000, then your estimated amount would be $11,800 (90% – $12,000). As a result, you would only be required to pay $10,000 by January 15, 2016, but you are writing a check on April 15, 2016 for the $2,000 balance. If your 2015 tax is $9,000, then you would only be required to pay only $8,100 in the form of withholding and/or estimated taxes by January 15, 2016, and then still write a check for $900 on April 15, 2016. Even if you are not subject to the penalty, you want to know how much you are short prior to the end of the year so that you can be ready to pay the balance when you file your return.
In order to do better planning on withholding and estimated payments and avoid penalty, call me today to set up an appointment to discuss this and other important issues.
If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
