The IRS requires that a taxpayer make estimated tax payments if he or she expects to owe at least $1,000 in tax after subtracting any tax withholdings or credits. The easiest and most common safe harbor rule to avoid any interest and underpayment penalties when you file your tax return is to make sure that 100 percent of your prior year tax is paid in for the current year. For taxpayers with adjusted gross incomes over $150,000 ($75,000 for married filing separately), 110 percent of your prior year tax must be paid in for the current year.

Typically, when your tax return is prepared, your CPA automatically sets up estimated tax payments for the next year to meet this safe harbor rule, if applicable.

The other safe harbor rule is to make sure that 90 percent of your current year tax is paid in with your estimated tax payments. However, this safe harbor is harder to obtain since it requires precise record keeping and accurate tax projections. One slight change in the proceeds of an anticipated stock sale or the receipt of unexpected income could cause this safe harbor rule not to be met.

In addition, if your income or withholdings has significantly increased or decreased from the prior year, contact your CPA to review if the amount of estimated tax you are paying is appropriate.

Ultimately, the choice is yours as the taxpayer whether or not to make your estimated tax payments. But if you choose not to make your estimated tax payments, be prepared to pay interest and penalties on April 15 and be sure to let your accountant know that you did not make the planned payments.

As always, contact your Rea representative to review your tax situation today. Remember, implementing tax planning strategies now is easier than waiting until December. And, waiting until January is too late!

-By Erika Schuch, CPA (Millersburg office)

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