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Year-end ’08 personal tax strategy: Seek estimated-tax safe harbor

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in Small Business Tax,Small Business Tax Deduction Strategies

If you don’t pay enough tax during the year—including payroll withholding and quarterly installments—you could be assessed an “estimated tax” interest rate penalty for the underpayment.

Strategy: Make sure you qualify for one of the tax law “safe harbors.” You have three options:

  1. Pay at least 90% of the current year’s tax liability.
  2. Pay at least 100% of your 2007 tax liability (110% if your AGI for 2007 exceeded $150,000).
  3. Pay installments under a special annualized basis. This option is available only if you receive more income on a seasonal basis.

Usually, the easiest way to avoid a penalty is to base payments on 100% (or 110%) of the prior year’s tax liability. Reason: You know exactly how much you have to pay this year.

Tip: If you adjust your W-4 after you clear the Social Security wage base ($102,000 for 2008), you can use the employment tax savings for additional income tax withholding.

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