The first half of the year is in the books. It's time to take a look at your withholding and estimated tax payments. Why is this important? To avoid any potential penalty for underpayment of estimated taxes.
How do you calculate this? For taxpayers with adjusted gross income ("AGI") under $150,000, they need to have paid in 100% of the prior year tax. For example, if someone's AGI was under $150,000 and their tax was $20,000, they would need to have paid in $5,000 per quarter or have this withheld. For someone with AGI over $150,000, they need to have paid in 110% of the prior year tax.
Here are four reasons to review this now:
- The Required Minimum Distribution ("RMD") is back. Taxpayers over age 70½ with IRA's or qualified retirement plan assets will have to take their RMD again this year. Last year there was no requirement to do this. This will increase taxpayer’s taxable income.
- All taxpayers need to be aware of the Alternative Minimum Tax ("AMT"). This is a nasty back door tax that may affect many more taxpayers this year. Congress created a “patch” the past few years to keep a lot of taxpayers out of paying AMT. If the “patch” is not approved again this year, many more taxpayers will be in for an unpleasant surprise and a tax increase. The AMT is not really titled very well—there is nothing “alternative” about it. Taxpayers don't get to choose if they pay this or not. Taxpayers need to calculate their taxes two ways. First, calculate the tax under the regular method, second under the AMT method. Pay the higher of the two taxes. The AMT starts with regular income and then makes adjustments to it. The biggest add back is typically for state, local, and property taxes.
- Taxpayers that started collecting social security benefits in 2010 will also have higher taxable income.
- Tax rates may rise in 2011. By reviewing your withholding and estimated tax payments now, you will be in a better position to handle potential changes that may be made in 2011.
ACTION ITEM: Review your withholding and estimated tax payments to assure you will not have to pay a penalty for underpayment of taxes.
Thomas F. Scanlon, CPA, CFP®