Many of us had plans for all that we were going to accomplish in 2017. Here we are, already in November. In just few short weeks, we’ll be celebrating the upcoming new year, 2018. Where has 2017 gone? How are we going to get everything done? If we can’t get everything done, are there one or two things we should focus on that might save us money in the long run?
One thing we can do is evaluate our income tax situation for 2017 to date and estimate where we need to be at the end of the year. Now is the time to do that, if you have not done so already, while you still have a little time to make adjustments to get into the position you need to be by the end of the year.
The U.S. income tax system is a “pay as you go” system, which means that by the end of the year, or by mid-January of the following year if we make estimated tax payments, we have paid all the tax we owe for the year. If we fail to meet that requirement, we are subject to underpayment penalties. If we pay in too much, we are losing the use of our own money and making an interest-free loan to the government.
One way to evaluate your status is to look at the taxes you paid for 2016. Not the refund you got. Not the amount you owed to make up the shortfall. Look at the actual tax bill. Look at Line 61 on your personal Form 1040 for 2016 – that is, the “Total Tax” line.
Then, ask yourself these questions:
- Is my income about the same as it was in 2016?
- Do I still have the same number of persons I can claim as dependents as I did in 2016?
- Did I pay about the same mortgage interest in 2017 as I did in 2016?
- Did I pay about the same real estate tax as I did in 2016?
- Have I paid in, either through withholding or estimated tax deposits, about 90% of the tax as shown on my 2016 tax return?
- Will I pay in the remaining 10% of taxes during the last few weeks of 2017?
While every situation is unique and there may be other variables to your tax situation, if you can honestly answer “Yes” to all of the above questions, you should be in pretty good shape as far as avoiding underpayment penalties.
On the other hand, if you cannot answer yes to all the questions, you now know that you need to do something, particularly if you have underpaid to date. You still have a short period of time to catch up.
How can you catch up?
You can change the exemptions you are claiming by filing a new W-4 with your employer. Claim fewer deductions to have more withheld. You can even have a specific, additional amount withheld from your check. Most employers need some time to implement such changes, so you need to check with your payroll department right away if this is your situation.
If you make your own tax deposits, you can increase the amount of the deposits. Or, make more frequent deposits that might be smaller individually but total more in the end.
If you do this review and make the necessary adjustments, you will likely save some money in the long run by avoiding or minimizing underpayment penalties.
For additional information or assistance, contact the Sodowsky Law Firm at 703.968.8000 to schedule a confidential consultation.