The final likelihood for some filers to keep away from a tax penalty is Jan. 18
“Taxes” engraved at the IRS headquarters in Washington, DC
Andrew Kelly | Reuters
Next week could be the last chance for some claimants to avoid a tax penalty and reduce their April bill.
The deadline for fourth-quarter estimated tax payments is January 18 for income from self-employment, small business, gig economy work, investments, and more.
And if you missed previous quarterly 2021 payments, you can make additional payments now, which can reduce or eliminate late penalties, instead of waiting until the April filing deadline, the IRS said.
“Everyone has to pay taxes,” says certified financial planner Bryan Hasling, a partner at Lodestar Private Asset Management in Alamo, California. “And the IRS strongly prefers that you pay them continuously throughout the year rather than waiting until the last minute — tax day.”
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The quickest way to make an estimated quarterly tax payment is through IRS DirectPay or sending money through your IRS online account. However, there are other options here.
The late payment penalty is 0.5% of your balance due, up to 25% for each month after the due date.
You can skip penalties by covering 90% of your 2021 taxes or paying 100% of your 2020 bill if your adjusted gross income is less than $150,000. (You need 110% of your 2020 bill if you earn more than $150,000.)
If you had similar income in 2020 and 2021, you can review your 2020 tax return for last year’s tax liability and split that number into four quarterly payments.
However, following those guidelines could still result in a hefty 2021 bill, explained Or Pikary, a chartered accountant and tax consultant at Mazars, a Los Angeles tax consulting firm.
Independent contractors are often paid at the end of large projects. And these schedules may not align with the IRS quarterly schedules.
Partner at Lodestar Private Asset Management
“The situation changes from year to year,” he said. “2020 could have been a bad year and you might not be paying enough.”
Additionally, child tax credit advance payments used 2019 or 2020 income to determine eligibility, meaning you may have to pay back a portion of it if your 2021 income doesn’t qualify, he said.
Other scenarios that might require estimated tax payments might include selling a property, paying off investments including cryptocurrency, or withdrawing funds from inherited retirement accounts, said Olga Espiritu, a CFP and president of the Tree Of Life Wealth Advisory Group in Cooper City, Fla.
“These are things that people don’t typically deal with every year, and they might come as a surprise,” she said.
However, there may be some scenarios where filers intentionally skip estimated payments despite the late fee because they don’t have the cash or prefer not to siphon off their savings, said Lodestar Private Asset Management’s Hasling.
“Independent contractors often get paid at the end of large projects,” he said. “And those schedules may not align with the IRS quarterly schedules.”
Making estimated tax payments may depend less on the penalty and more on their cash flow, Hasling said.