Don’t miss the first installment of “estimated taxes” for 2013. The deadline for the first quarter of 2013 is April 15.
Strategy: Navigate the “safe harbor” rules in the law. Otherwise, you could be held liable for an underpayment penalty plus interest.
Here’s the whole story: Generally, you’re required to pay your annual federal income tax bill in quarterly installments or through payroll tax withholding (or a combination of the two). The quarterly due dates for the tax payments are April 15, June 15, Sept. 15 and Jan. 15 of the following year (or the next business day if the due date falls on a weekend or holiday). Failure to pay the required tax can trigger the penalty.
However, you can avoid potential problems by qualifying under one of these three safe-harbor rules:
- You pay at least 90% of the current year’s tax liability. This requires a well-calculated “guesstimate” of your current tax situation.
- You pay at least 100% of the prior year’s tax liability (110% if your adjusted gross income for the prior year exceeded $150,000). This is often the easiest method because you know the exact amount of your previous tax liability.
- You pay at least 90% of the current year’s tax based on “annualizing” your income. The annualization method works best for certain individuals, such as independent contractors, who receive most of their income on a seasonal basis.
Your tax liability may be higher in 2013 than last year if you’re in the new top 39.6% tax bracket. In addition, an employee or self-employed individual won’t benefit from a 2% reduction in employment or self-employment tax. The “payroll tax holiday,” which spanned 2011 through 2012, is over.
Tip: Therefore, you might have to adjust your tax payments to Uncle Sam accordingly in the form of increased withholding or bigger installments.
Online resource: The IRS provides work sheets to help you calculate your estimated tax liability.