Tax Reform Won’t Change 2017’s Requirements for Estimated Payments

Apr 10th 2017
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This past February, Treasury Secretary Steven Mnuchin told the Wall Street Journal that the Trump administration wants to overhaul the tax code before Congress leaves for its August recess. But he acknowledged that passing complex legislation in less than six months was “an ambitious timeline,” and that the administration and Congress might be unable to meet and “it could slip to later this year.”

On March 22, the Journal concluded that Mr. Mnuchin was overly optimistic. “It is looking as if the legislation might not land on President Donald Trump’s desk until early next year.”

Segue to two days later, when the president pulled the plug on repeal of the Affordable Care Act. His self-inflicted debacle will make it even more difficult for him to accomplish the already daunting task of cutting deals with a combative Congress for a top-to-bottom rewrite of the tax laws, a pledge he frequently made during the election campaign and after taking office.

For planning purposes, let’s assume that Voltaire’s Doctor Pangloss was right. Whenever reductions in rates and other tax cuts are enacted, they are going to take effect soon enough for them to retroactively apply to the start of tax year 2017. In that case, estimates of quarterly payments based on 2016 payments may turn out to be too high.

If that happens, noted the New York Times of Feb. 19, “taxpayers will need to recalculate their estimates” subsequently – in April, June, September or even next January, “depending on when a law is enacted – and reduce their payments accordingly.”

Whatever happens, the IRS isn’t going to relax the long-standing rules for estimated payments. As a result, taxpayers who are indifferent to the due dates for payments might incur sizable, nondeductible penalties. What follows is a rundown of the basics.

Who remains in the IRS’s crosshairs? Individuals who receive income from sources not subject to withholding and whose estimated tax exceeds $1,000.The agency requires them to use Form 1040-ES, Estimated Tax for Individuals, to submit their payments of taxes (including any self-employment tax).

The IRS exacts payments mostly from persons in these categories:

  • Freelancers and other self-employed persons who operate businesses or professions as sole proprietorships, in partnerships with others, or as independent contractors.
  • Investors who receive interest, dividends, and capital gains.
  • Property owners who receive rents or royalties.
  • Retirees who opt not to have taxes withheld from Social Security benefits, pension payments, or removals of funds from IRAs and other kinds of tax-deferred retirement plans.
  • Recipients of taxable alimony.

Due dates for payments will remain unchanged. For tax year 2017, the deadlines are April 18 (the April 15 falls on a Saturday), June 15, Sept. 15, and Jan. 16, 2018 (Jan. 15 is Martin Luther King Jr. Day). However, the IRS allows individuals to skip January’s payment, provided they submit their 2017 returns and pay their tax in full by Feb.1.

Curb your enthusiasm for payment reductions. The agency imposes penalties for failing to pay sufficient tax during the year through withholding or estimated payments, as well as for failure to pay required installments on time as they become due. It’s immaterial that your payments are sufficient to erase any balance due when you submit 2017’s 1040 form in 2018.

Additional articles. 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 180 and counting).

Stay competitive with your fellow accountants who turn to the articles when, say, they correspond with clients or they want to show clients how to nimbly sidestep pitfalls while capitalizing on opportunities to diminish, delay, or deep-six payments of sizable amounts that would otherwise swell IRS coffers.

Also be mindful of the articles when you strive to build name recognition, a goal attainable only by choosing and implementing strategies that set you apart from ferocious competition. Use the articles to prepare talks to audiences, such as business owners, investors, and retirees.

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