Keeping the Tax Underpayment Penalty at Bay
Keeping the Tax Underpayment Penalty at Bay
If you underpay your Federal Tax obligation throughout the year you could be in for a tax penalty when you file next year’s tax return. Outlined here are steps to take to avoid this underpayment penalty.
With the 2013 tax year behind you, now is the time to plan appropriately to make sufficient estimated tax payments. An underpayment of estimated tax may apply if you still owe $1,000 or more in additional tax after accounting for withholdings and estimated payments made throughout the year. Remember, to avoid underpayment penalties you are required to prepay either;
- 100% of last year’s tax obligation* OR
- 90% of next year’s tax obligation
* If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty.
If you think you will need to make periodic payments to the IRS over the year to avoid the penalty, here are some pointers:
- Payments are due quarterly. The payment dates are:
- 1st Quarter: 4/15
- 2nd Quarter: 6/15
- 3rd Quarter: 9/15
- 4th Quarter: 1/15 of the following year.
Should any of these dates fall on a weekend, the Form 1040 ES payment is due on the next business day.
- Add to withholdings. If it looks like your paycheck withholdings will be too low, adjust the amount withheld. One of the benefits of this approach, is that withholdings deducted from a paycheck are not date sensitive, while quarterly estimated payments made late can still cause an underpayment penalty.
- Front load payments. Often it is hard to project your income if you own a small business. If possible, pay a little extra in the first or second quarter to avoid the underpayment penalty exposure by paying the estimated payments later in the year.
If you have not already done so, please call (813) 283-0642 to help assess your situation.
Virtual Currency…Every Bit Counts
Virtual Currency…Every Bit Counts
A recent IRS ruling on virtual currencies like Bitcoin classify them as property. This ruling has far reaching consequences on this new concept. Here is what you need to know.
In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know;
- As property. Property is subject to gains and loses. So if you use a virtual currency like Bitcoin, you must keep track of the original cost of the coin and its value when you use it. As a capital asset you must also know whether your gain or loss on use of the virtual currency is a short-term or long-term.
- As income. Wages paid in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to employment taxes. Income received as an independent contractor has self-employment rules applied and must follow Form 1099 reporting requirements.
- A currency? Per the IRS, no. Businesses have the ability to calculate foreign currency gains and losses on their financial statements. This foreign currency gain or loss calculation is not available for virtual currencies like Bitcoin.
- Determining value. If you purchase or sell something using a virtual currency, you need to determine the fair market value of the transaction using a valid virtual currency exchange and translating it into U.S. dollars.
- Miners have income. Miners are those who receive Bitcoins and other virtual currencies by validating transactions and maintaining public Bitcoin ledgers. If you are someone who “mines” virtual currency, you create income upon receipt of the currency. This is a taxable event.
As the technology of alternative methods to exchange goods and services evolves, so will your need to understand it. Should someone offer to provide you with Bitcoins for products and services, you will now know there are tax implications to saying yes.
Leaving a Job? Don’t Take a Tax Surprise with You
Leaving a Job? Don’t Take a Tax Surprise with You
A recent Supreme Court decision could impact the taxes you pay when you leave a job. Being aware of this new change could save you plenty if you pay attention to your severance…
An inevitable part of life is a changing jobs. Now a recent Supreme Court decision clarifies that severance payments you receive when you leave your job are wages and subject to employment taxes. So how might this impact you?
Background
All employees and employers pay FICA taxes. There are two components;
Social Security. Social Security tax rates are 6.2% for the employee and 6.2% for the employer (total 12.4%) on the first $117,000 of wages in 2014.
Medicare. Medicare tax is 1.45% for the employee and another 1.45% for the employer (total 2.9%). There is also a potential Obamacare surcharge if your wages exceed $200,000 single and $250,000 married.
Many employers who pay a severance check to employees when they leave have classified these checks as other, non-wage, income. This allows both the employer and employee to save on paying these FICA taxes.
What you should know
In a recent Supreme Court ruling, these severance checks are now deemed to be wages and subject to employment taxes. The IRS estimates there are currently over $1 billion in potential wages that are impacted by this decision. Knowing this, here are some tips to consider.
- Check withholdings. If you leave your job ensure all payments to you are wages on a W-2. Check your last payroll check to see that the correct Social Security and Medicare taxes have been withheld.
- The 1099 warning flag. If you receive a check without a payroll stub, you will probably be receiving a 1099 in the future. In this case, you could be picking up the employer’s Social Security and Medicare tax responsibility as well as your own. To avoid this unpleasant surprise, ask for clarification from your former employer. Get the payment reissued as wages, if appropriate.
- Other things to check. While you are at it, review that final employer payment to ensure your unused vacation is also paid to you per their employee policy. When you check for withholdings on your last paycheck also ensure the level of withholding is at the level you requested on your normal paycheck. Often these last checks use withholding defaults versus the level you requested on your W-4.
- Other benefits. While this tax tip deals with severance check taxability, don’t forget to plan for the transition of your other benefits as well. These include things like health insurance, dental/vision, retirement plans, Health Savings Accounts, and pensions.
Tax-Free Roth IRA Withdrawal Options
Tax-Free Roth IRA Withdrawal Options – What every Roth IRA account holder should know
While Roth IRAs are funded in after-tax dollars, making a mistake on fund withdrawal could still subject you to tax and penalties on withdrawal of earnings. Here are some tips.
You must take care to plan your retirement plan withdrawals to avoid a potential 10% early withdrawal penalty. Unfortunately, each retirement account type has different rules. Here are some tips for Roth IRAs.
Roth IRA basics
Roth IRA accounts differ from other IRAs in that your contributions are made in after-tax dollars. If you follow the Roth IRA rules, your withdrawals of any earnings in the account can be tax-free. Generally, to take advantage of the tax-free distribution from a Roth IRA:
- You must be age 59 ½ or older.
- You must have had funds in the Roth IRA account for more than 5 years.
- You must understand what is being distributed (contributions, converted funds or account earnings).
- You must know your possible tax-free distribution options.
If you do not comply with these rules you could be subject to income tax and a 10% early withdrawal (distribution) penalty. But wait! There are ways to avoid income tax and the early withdrawal penalty.
Roth IRA distribution tips
- Remember contributions have been taxed. What many forget is that your initial contributions have already been taxed. The portion of your early distribution from a Roth IRA account subject to income tax is only the untaxed earnings on your contributions.
- 10% early withdrawals. Early withdrawal penalties are subject to the five year account rule and how you use the funds when distributed. It also might depend on what funds you remove from your account. Prior to withdrawing funds, ask for help to ensure you know whether you will be subject to the early withdrawal penalty.
- Qualified early withdrawals. If you use the distributions for a qualified reason, you can avoid the early distribution penalties. Some of the more common qualified early withdrawals with Roth IRA’s are:
- College. If you withdraw Roth IRA earnings to pay for college expenses, you will pay tax on the earnings withdrawn, but you will not be subject to the 10% early withdrawal penalty.
- First-time home buyer. Even if you’ve had your Roth IRA for less than five years, you can withdraw up to $10,000 in Roth IRA earnings income tax-free and penalty tax-free if it is used to buy a first home.
- Account holder disability or death.
- Unreimbursed medical expenses that exceed your itemized deduction threshold.
- Substantially equal periodic payments. These must be made over the defined life-expectancy of the IRA holder using specific rules to avoid the early withdrawal penalty.
- No minimum withdrawal requirements. Unlike other IRAs, the Roth IRA does not require you to take money out when you reach a certain age. With Traditional IRAs this withdrawal requirement occurs when you reach age 70 ½. This means you can have a strategy to never withdraw the funds in your Roth IRA as an estate-planning device. While the funds would be considered part of your estate, your heirs could withdraw the funds tax and penalty-free during their lifetime.
- Keep separate accounts. The taxability of a withdrawal can be complicated. Are you withdrawing contributions, converted funds, or earnings? How long have the funds been in the Roth IRA? Because this can be complex, try to keep your Roth IRA accounts simple. If you convert funds from another retirement account into a Roth IRA, do so in a separate account. It will then be easier to understand the impact of a withdrawal from the account.
If you have questions regarding your situation, speak to a qualified planner prior to taking any withdrawals from a Roth IRA or other tax advantaged retirement plan. It could save you plenty in potential tax and penalties.