Estimated Income Tax Underpayments

Quick take:
Given the high interest rate environment, the IRS currently charges an interest rate of 8% on estimated tax underpayments. All taxpayers are susceptible to this penalty and should be cognizant of their estimated tax payments.

For individual taxpayers, the federal income tax is a “pay-as-you-go” regime.  This means that taxes are generally owed as you earn your income throughout the year.  If a taxpayer fails to withhold sufficient taxes or make quarterly estimated tax payments, he or she may be subject to interest and penalties.  As interest rates have risen, the interest charged by the IRS has increased and is now 8%.  This higher interest rate can lead to surprise taxes when clients file their taxes in April.

Taxpayers can typically shelter themselves from underpayment penalties by following the safe harbor rules for estimated payments. This directs individual taxpayers to withhold at least 90% of the current-year tax liability or 110% of the previous year’s tax liability (100% of previous year liability if your Adjusted Gross Income is less than $150,000 and filing Married Filing Jointly) by January 15 following the close of the tax year, with the safe harbor amount having been met on a quarterly basis.

 

Estimated Tax Payment Schedule for Individuals:

 

Quarter

 

Income Period

 

Due Date

 

Quarter 1

 

January 1 – March 31

 

April 15

 

Quarter 2

 

April 1 – May 31

 

June 15

 

Quarter 3

 

June 1 – August 31

 

September 15

 

Quarter 4

 

September 1 – December 31

 

January 15

 

Avoiding Missed Estimated Payments:

 

DISCLAIMER

This analysis was prepared by members of the financial planning design team at Summit Financial LLC (“Summit”).  The Summit financial planning design team includes attorneys and/or CPAs who act exclusively in a non-representative capacity with respect to Summit’s clients.  Neither they nor Summit provide tax or legal advice to clients.  Clients should make all decisions regarding the tax and legal implications of their investments and plans after consultation with their independent tax or legal advisors.  Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local taxes.

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