In a previous column, I discussed a few ways your clients can sidestep estimated tax penalties. Here, I’ll discuss two other strategies.
Have them take advantage of the “safe harbor” rules.
The exceptions excuse you from any penalties for underpayments of more than $1,000 for withheld or estimated taxes. (These don’t apply when the amount is less than $1,000.) You’re excused only if you satisfy a two-step requirement:
First, you make payments by 2019’s due dates. Those were discussed in the previous column.
Second, as explained in the earlier column, 2019’s combined estimated and withheld taxes equal at least 90 percent of the actual taxes you owe for 2019 or 100 percent of 2018’s total tax liability, whichever is the lesser figure.
The exception based on the prior year’s tax is available even if the amount due was zero, provided the return covered 12 months, as it ordinarily would.
As the prior-year exception uses a fixed number, it’s the easiest way for most individuals to figure out their payments and dodge underpayment penalties. To illustrate: Your client’s payments total $12,000 for 2018 and $12,000 for 2019. The IRS won’t impose penalties. It doesn’t matter how much they owe when they file for 2019.
Stricter rules apply when 2018’s adjusted gross income exceeds $150,000 ($75,000 for married couples who file separate returns). To use the 100 percent escape hatch, payments must equal 90 percent of 2019’s tax liability or 110 percent of 2018’s total tax—again, whichever is less.
Another exception is available for someone who pays 90 percent of 2019’s total tax, figured by “annualizing” the income actually received by the end of the quarter in question.
The annualizing exception helps those whose incomes unexpectedly increase or fluctuate throughout the year, as when a freelance writer receives book royalties in December of 2019. The IRS allows taxpayers to make “unequal tax payments, based on when they receive their income, rather than four even payments.”
But be warned: This calculation is complicated.
Then, there’s the waiver of penalty for hardship, retirement or disability. The law authorizes the IRS to waive a penalty when the failure to make a payment is due to a casualty, disaster or other unusual circumstances and imposing a penalty would be inequitable or against good conscience.
Also, the IRS has discretion about whether or not to exact a penalty from a retired or disabled person when the failure to make the payment is due to reasonable cause and not due to willful neglect. But this break is available only for penalties incurred during the first two years after an individual retires upon reaching age 62 or becomes disabled.
A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 275 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.