Advisors

There’s another sneaky tax deadline on April 18. Here’s how to avoid a penalty

Prathanchorruangsak | Istock | Getty Images

With one week left to file your federal taxes, it’s easy to overlook another sneaky deadline: the due date for first-quarter estimated tax payments.

If you have income from self-employment, a small business, gig economy work, investments and more, you must make a payment by April 18.

You need to pay if you expect to owe $1,000 or more in taxes for 2022, according to the IRS. But estimated payments may reduce or eliminate penalties.

“Everyone needs to pay taxes,” said certified financial planner Bryan Hasling, partner at Lodestar Private Asset Management in Alamo, California. “And the IRS strongly prefers that you pay them steadily across the year as opposed to waiting until the last minute.”

The fastest way to make a quarterly estimated tax payment is through IRS DirectPay or sending money through your IRS online account. However, there are other available options listed at the IRS online payments webpage.

The late payment penalty is 0.5% of your balance due, for each month after the due date, up to 25%.

If your employer withholds money from each paycheck, you can skip estimated tax payments. But you can use the withholding estimator tool to make sure your employer is taking enough.

You can avoid penalties by covering 90% of your 2022 taxes or paying 100% of your 2021 bill if your adjusted gross income is $150,000 or less. (You’ll need 110% of your 2021 bill if you earn more than $150,000.)

If you expect to make a similar income to last year, you can check your 2021 return for last year’s tax liability and divide that number into four quarterly payments.

Independent contractors often get paid at the end of large projects. And those timelines might not line up with quarterly schedules from the IRS.
Bryan Hasling
Partner at Lodestar Private Asset Management

Other scenarios that may require estimated tax payments could be selling a property, cashing out investments — including cryptocurrency — or taking money from inherited retirement accounts, said Olga Espiritu, a CFP and president of Tree Of Life Wealth Advisory Group in Cooper City, Florida. 

“Those are things that people don’t usually deal with every year, and they might come as a surprise,” she said. 

Reasons to skip payments

However, there may be some scenarios where filers purposely skip estimated payments, despite the late fee, because they don’t have the cash or prefer not to drain their savings, Hasling from Lodestar Private Asset Management said. 

“Independent contractors often get paid at the end of large projects,” he said. “And those timelines might not line up with quarterly schedules from the IRS.”

Whether to make estimated tax payments may be less about the penalty and more about their cash flow, Hasling said.

Products You May Like

Articles You May Like

Inflation Is Surging, So Are Federal Tax Collections
American Airlines will add new premium suites in 2024 in race for high-paying travelers
Self-made millionaire credits his wealth to these 4 ‘unpopular’ money rules: ‘Don’t buy anything you can lease’
Is this the end for FAANGs? 🤔
Watch: World leaders honor Queen Elizabeth at her funeral

Leave a Reply

Your email address will not be published.