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How to protect yourself from underpayment penalties

September 9, 2014

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You can be subject to penalties if you don’t pay enough tax during the year through estimated tax payments and withholding. Here are some strategies to protect yourself:

Know the minimum payment rules. Your estimated payments and withholding must equal at least 90% of your tax liability for 2014 or 100% of your 2013 tax (110% if your 2013 adjusted gross income was over $150,000 or, if married filing separately, over $75,000).

Use the annualized income installment method. This may be beneficial if you have large variability in monthly income due to bonuses, investment gains and losses, or seasonal income (especially if it’s skewed toward the end of the year). Annualizing computes the tax due based on income, gains, losses and deductions through each estimated tax period.

Estimate your tax liability and increase withholding. If you’ve underpaid, have the tax shortfall withheld from your salary or year end bonus by Dec. 31. Withholding is considered to have been paid ratably throughout the year, whereas an increased quarterly tax payment may still leave you exposed to penalties for earlier quarters.

Let us know if you have questions about underpayment penalties and how to avoid them.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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