Summer is over. School has begun. Football season is in full swing. So why should you think about taxes now? Isn’t that a spring thing?
Taxes never sleep, so you can’t sleep on taxes. Here are three things you should be thinking about right now.
Estimated Income Tax Payment Due September 15
Your third estimated income tax payment is due on September 15. While this mostly affects self-employed people or people with 1099 income (like commercial real estate brokers!), it can affect other people as well, especially if you have had unexpected income during the year. The IRS expects that you will pay your income taxes ratably over the course of the year, so if you have big income in one quarter, you need to pay big income taxes in that quarter.
Also, you have to look out for underpaying your income taxes. For most people, as long as you pay–on a quarterly basis–the lesser of (a) 90% of your total tax liability for the current year or (b) 100% of the tax liability for the previous year, you won’t face a penalty for underpayment. However, two things complicate this. If you have an Adjusted Gross Income (AGI) greater than $150,000, your threshold is not 100% of the previous year’s tax, it’s 110%. And, as for paying 90% of this year’s tax liability, you probably won’t know your income tax liability until next April–for people with variable income, like real estate brokers, that can be tough to judge.
At any rate, pay your third estimated income tax installment by September 15!
Prior Year Tax Payment Due October 15
If you filed your income tax return on time in April and chose to delay payment, your time is up! Your payment is due on October 15.
Current Year Tax Planning
We’re two-thirds of the way through the year now, so you should have a pretty clear picture of where your income and expenses are going to end up for the year. Now is the time to take charge of your finances so that you aren’t surprised when you figure your income taxes in April next year.
If This Has Been a Strong Year…
Your income may have been strong enough that it may move you into a higher tax bracket or limit tax deductions and credits that you have been able to take previously. Here are some steps to consider:
- Delay income until next year. If you’re expecting a big commission check in December, see if you can push it out until January.
- Accelerate expenses into this year. If there are expenses you know you are going to incur early next year, see if you can pay them this year. BUT DO NOT SPEND EXTRA MONEY JUST TO SAVE ON TAXES. You still lose if you do that.
- Contribute to non-Roth retirement and health savings accounts. This can lower your taxable income.
- Review your charitable giving and find opportunities to give this year.
If this Has Been a Weak Year…
Generally speaking, try to do the opposite of those things. Instead, consider:
- Accelerate income into this year. If you’re expecting a big commission check in January, see if you can pull it into this year.
- Delay expenses until next year. If there are expenses you know you are going to incur late this year, see if you can pay them next year.
- Delay your charitable giving until next year.
- Roth conversions, if you have cash to pay the additional taxes that this will generate.
All of these week year considerations assume that next year is going to be better than this year, so you’re trying to bring net income from next year into this year, so that the income is taxed at a lower bracket this year. If you expect that next year will look essentially the same as this year, then these are less advantageous for you.
At Dominion Financial Advisors, we are financial planners and wealth managers. Your accountant will help you figure out how much tax you owe, but we will help you plan in advance so that you can manage your taxes, instead of letting the IRS manage you. Schedule a complimentary consultation with us to see how we can work together to plan your financial future.