Kelly Bullis
New Year’s resolutions have a funny habit of sounding and feeling good when we first make them, and then they get broken so quickly and many folks just give up.
Unfortunately, one of the easiest resolutions to break is paying quarterly estimated taxes. That failure can become expensive.
Generally, you’re required to pay federal income tax (and applicable states, too) for the current tax year in some manner. Your options are withholding (the easiest), and paying quarterly estimated tax installments. If most of your income comes from sources that offer federal income tax withholding, then you may not need to do estimated tax payments. If most of your income comes from investments, rentals, pass-through entities (such as partnerships and/or sub-s corporations), or other self-employed business activities, then estimated tax should be a regular part of your process of making the advance payment of current year tax. Sometimes retirees may also have to make estimated tax payments due to Social Security benefits, investment income, and required minimum distributions from IRAs and other retirement accounts. (Although they can have withholding from some of those income sources increased, eliminating the need to make estimated tax payments.)
Your estimated tax liability is based upon the prior tax liability. If you don’t pay in at least 100% of the prior year tax liability, or at least 90% of the current actual tax liability, or 110% if your adjusted gross income for the prior year exceeds $150,000 for single folks, the IRS drags out the dreaded “underpayment of estimated tax penalty. Currently it is 8%. Many folks believe they can earn more than 8% by not making an “interest free loan” to the federal government and gladly pay the 8% penalty. As an example, the S&P500 Index earned over 26% increase in 2023. So far, for 2024, it has grown at almost the same rate of 26%. If you invested $100 in the S&P500 Index, you would have earned $26. Then paid $8 in penalty to the IRS, netting $18 more than if you just paid the IRS the $100.
The IRS has set certain dates when quarterly estimated taxes are due. The first one, the IRS is generous in not requiring the payment before you should have a good idea of your prior year actual tax liability. The payment dates are: First, April 15; second, June 15; third, Sept. 15; fourth, Jan. 15.
The most logical and simplest approach is to take 25% of your prior year tax and pay that each quarter. Of course, if the prior year tax included some one-off events such as a large capital gain, a conversion of an IRA to a Roth IRA, etc., then you might want to take your chances and pay less each quarter knowing you are not “protected” from the potential penalty if you end up owing.
Have you heard? 2 Chronicles 24:9 says, “They made a proclamation through Judah and Jerusalem, to bring in for Yahweh the tax that Moses the servant of God laid on Israel in the wilderness.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.