Reflection of the Week

Happy Friday, everyone!

I hope your week has been great.

For many individuals and business owners, this week may have involved some contemplation on estimated taxes. The fourth and final payment deadline recently passed, and if you found yourself preoccupied with this financial obligation, you’re not alone.

Now, I know that estimated tax days are not the most thrilling on the calendar. It’s that time when I, as a financial advisor, often play the role of the bearer of not-so-great news, informing clients about the amounts they should be paying. Yet, as unappealing as it may be, addressing your estimated taxes promptly can save you from facing a hefty bill next April.

But what if you miss the deadline? Don’t worry; you still have an opportunity to settle your payment. However, there’s a catch – you’ll incur a penalty for the underpayment of estimated taxes. This penalty is calculated at 0.5% (or 0.005) of the amount you owe, starting from when the payment was due. If you wait until next April to square things away, you could be dealing with several months’ worth of accumulated penalties.

You might be thinking, “0.5% doesn’t sound like much.” True, it might seem small, especially when compared to potential earnings from keeping your money in an online savings account. For diligent savers, this might be a more financially advantageous option.

However, the real challenge arises for those who aren’t as disciplined with their savings. They not only face the penalty but also need to figure out how to come up with the additional funds they’ve already spent.

For most business owners, my recommendation is simple – make the payment and get it out of the way.

It’s also crucial to recognize that avoiding the penalty is possible if you owe less than $1,000 in tax after accounting for withholdings and credits. Additionally, meeting either of the following conditions can exempt you from the penalty: paying at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

If you’re interested in delving deeper into the details of this penalty, Publication 505, Tax Withholding, and Estimated Tax is a valuable resource.

In conclusion, while estimated tax days may not be the highlight of your year, staying on top of them can save you from unnecessary financial burdens down the road. Remember, a small penalty now is far more manageable than a large one later. Your financial future is worth the investment – your future self will undoubtedly thank you for your proactive approach to estimated taxes.

 

Questions of the Week

What did you ow for 2023 (line 24 on your 2022 1040)?

How much have you paid so far this year?

Did you need to make an estimated tax payment?

 

Reminder of the week

With estimated taxes out of the way, the tax form deadline (1099-NEC, W-2s, 1099-R, etc) is January 31st. So start collecting your forms if you haven’t!