September 19, 2013

Give Withholding and Payments a Check-up to Avoid a Tax Surprise

Share this article...

On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.

Give Withholding and Payments a Check-up to Avoid a Tax Surprise

Article Highlights

2013 could hold some unpleasant tax surprises because of :

o Increased long-term capital gains rates.
o Increased ordinary tax rates.
o A new 3.8% tax on net investment income.
o The new additional 0.9% HI (Medicare) payroll and self-employment tax.
o Life-changing events such as marriage, birth of a child, or new job.
o One-time increase in income from sales of stock or real estate.
Under-withholding and underpaid estimates could cause penalties, but corrective actions before year-end may mitigate the penalties.

2013 will hold some unpleasant tax surprises for many taxpayers simply because of the increased long-term capital gains tax rates, the ordinary income tax rates, and the imposition of two new taxes as part of the Affordable Care Act, including a new 3.8% surtax on net investment income and an additional 0.9% payroll and self-employed health insurance tax.

Other factors can also have an impact on the results of your tax return. These include life events such as marriage, birth, or adoption of a child; divorce or separation; the death of a spouse; a new job; a bonus; or a spouse going to work.

You may have sold a business, real estate, stocks, or other assets that will produce a one-time increase in income.

So, if you have a substantial increase in tax as the result of any of the above or other events, it may be wise to review your withholding and/or estimated tax payments to ensure you have set aside funds for the increase in taxes and have paid in enough in advance to avoid or minimize an underpayment penalty.

Generally if you have not paid evenly throughout the year withholding and estimated taxes, so that they will equal 90% of your tax liability for the year or 100% of the prior year’s liability (110% if your income is over $150,000), you may be subject to an underpayment penalty for the year. This office can project your 2013 tax liability to prepare you for your tax liability and so you can either adjust your withholding or make estimated tax payments to minimize penalties. If you are already set up to pay estimated tax, revising the remaining payment vouchers may be appropriate.

If a potential large tax liability is discovered early enough, your withholding for the rest of the year can be adjusted. Withholding is treated as deposited ratably over the course of the year even if paid towards the end of the year, which helps mitigate underpayment penalties where you are underpaid in the earlier quarters.

If this office can be of assistance with tax planning, tax projections, or in modifying your withholding and estimated payments, please call for an appointment.

Newsletter

Give Withholding and Payments a Check-up to Avoid a Tax Surprise

Have a Question About This Topic?