Estimated Tax Check-up
At Boeckermann Grafstrom & Mayer, LLC, our tax and advisory professionals are here to help our clients every step of the way. Our objectives are to help you manage risk, control costs, address challenges, and help you achieve your goals. We go beyond the traditional compliance process to identify potential tax savings, minimize tax liabilities, and generate future planning opportunities.
Since we are approaching mid-year, it would be beneficial to schedule a meeting to discuss how your payments are tracking and make any necessary adjustments to your wage withholding and/or estimated tax payments. As a result of our mid-year “Situation Review,” we may discover that no changes need to be made, or perhaps that you are withholding too much rather than too little.
Time for a Tax Checkup
Although you know the amount of your 2015 tax bill, you most likely do not know what your 2016 tax will be. While it cannot be calculated with certainty, we can project your 2016 tax based on your financial picture thus far, as well as, on events and transactions you anticipate finalizing in the balance of this year.
It is also recommended that we review whether changes in your personal or financial situation during 2016 require a change in estimated tax payments or withholding. For example:
Were there any changes in your dependents?
Are there substantial changes in your investment income?
Are you expecting any large capital gains?
Was there a substantial change in your business income?
Are you planning to do a ROTH conversion or are you required to make a minimum distribution from an IRA?
Are you planning to make a substantial charitable contribution?
In addition, please keep the following points in mind regarding estimated taxes:
You want to avoid paying the IRS a penalty for underpaying your taxes during the year. If you owe the estimated tax underpayment penalty, which is nondeductible, in effect you are paying the IRS interest for part of the money you should have prepaid during the year for taxes, but did not. On the other hand, if you received a large refund on last year’s return, in effect you made an interest-free loan to the government, which you may want to avoid this year. If that happened, you should consider reducing the amount of withholding taken from your salary and/or the amount of estimated tax payments you make.
Basic Rules: There is no estimated tax underpayment penalty for the 2016 tax year if the total tax on your return reduced by withholding (but not by estimated tax payments) is less than $1,000. If the amount owed on an individual income tax return amount to $1,000 or more after subtracting withheld tax, the estimated tax underpayment penalty generally will not apply if your “required annual payment,” i.e. the amount that must be prepaid during the year in the form of withheld tax and estimated tax payments, equals at least the smaller of two amounts:
(1) 90% of your tax bill for 2016; or
(2) 100% of your tax bill for 2015
For example, if your tax bill for 2015 was $12,000, and your tax bill for 2016 will amount to $15,000 (90% of which is $13,500). In this case, you must prepay at least $12,000 of your tax bill during 2015 to avoid the underpayment penalty. On the other hand, if the tax you will owe for 2016 will only be $10,000, you will have to make timely estimated tax payment of only $9,000 for 2016 to avoid the penalty.
A tougher rule applies if your adjusted gross income for 2015 exceeded $150,000 ($75,000 for married persons filing a separate return). During 2016, to avoid the underpayment penalty, you must prepay the smaller of (1) 90% of the tax for 2016, or (2) 110% of the tax for 2015.
Note that the IRS can waive an underpayment penalty if you did not make the payment because of a casualty, disaster, or other unusual circumstance, and it would be inequitable to impose the penalty. The penalty also can be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.
Our Tax System is a “Pay-As-You-go” System: In general, one-quarter of your required annual payment must be paid by April 18, 2016; June 15, 2016; September 15, 2016; and January 17, 2017. Keep in mind that tax withheld from your salary is treated as an estimated tax payment, and that an equal part of withheld tax generally is treated as paid on each installment date.
You may be able to make smaller payments under the annualized income method, which is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.
These are just some of the factors to consider regarding estimated taxes. Everyone’s individual situation is unique and we would welcome the opportunity to meet with you to discuss your specific goals and objectives. Please contact us at 952-844-2500 or 651-227-9431 to schedule a tax check-up meeting with your BGM tax advisor. Thank you.
Very truly yours,
Boeckermann Grafstrom & Mayer
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