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Quarterly Tax Payments: Strategies and Workarounds

by
Lee Reams II
on
12/14/2023
Quarterly Tax Payments: Strategies and Workarounds

If you find yourself in the predicament of underpaying your estimated quarterly taxes in the first three quarters of the year, you might wonder if there's a way to avoid the underpayment fee by making full payments before the end of the year or the January due date.

Unfortunately, the answer is no—the penalty is computed on a quarterly basis. However, even if this specific situation doesn’t work out in your favor, all is not lost. There are several workarounds that taxpayers can explore to manage their tax liabilities more effectively.

1. Income Tax Withholding

Income tax withholding is treated as paid ratably throughout the tax year, regardless of when it is withheld. This opens up possibilities for taxpayers to collaborate with their employers to increase withholding substantially near the end of the year.

As November and December approach, taxpayers can engage in discussions with their employers to explore the possibility of significantly increasing withholding. By doing so, taxpayers can effectively compensate for any underpayments earlier in the year. This approach highlights the importance of open communication between employees and employers to optimize tax planning strategies.

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Credit: Hispanolistic/Getty Images

2. Strategic Handling of Distributions

For those dealing with distributions from retirement accounts like 401(k) and 403(b), there's an opportunity to manage withholding. While a mandatory 20% federal income tax withholding applies to distributions from 401(k) and 403(b) accounts, IRAs offer more flexibility. Taxpayers can elect out of withholding or request a specific amount, providing a strategic avenue for managing their tax obligations.

For instance, a taxpayer taking a $50,000 IRA distribution can request 20% withholding, resulting in $10,000 withheld. Within 60 days, they can then roll over $50,000, combining the $40,000 remaining from the distribution with $10,000 from other sources.

3. Addressing Income Variability

When a taxpayer's income varies throughout the year, filing Form 2202 with the worksheets from the instructions for Form 2210 can help avoid or mitigate the penalty. This is particularly useful when income is not consistent across quarters.

4. Seeking Penalty Waivers

The IRS may waive the penalty if a taxpayer can demonstrate they exercised ordinary care and prudence but were still unable to file their return or pay taxes on time. Requesting a waiver involves attaching a statement with Form 2210 to explain the circumstances.

5. Disaster Relief Provisions

In federal disaster areas, estimated tax payments are often suspended for the duration of the disaster period. This can lead to extensions of estimated tax deadlines, providing relief for affected taxpayers, even if they weren't directly impacted by the disaster.

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Credit: Justin Sullivan/Getty Images

Handling Excess Payments

For individuals who overpay their estimated taxes, there are two options:

Apply the Excess to Subsequent Year's Estimates: The excess can be applied to the following year's estimates, offering a practical way to manage tax obligations.

Request a Refund: Alternatively, taxpayers can choose to have the excess refunded, providing more immediate financial relief.

For those who do not estimate their taxes quarterly, paying safe harbor estimated taxes—totaling 110% of the prior year's tax in equal installments—can exempt them from underpayment penalties. This strategy offers a simplified approach for those who may find quarterly estimates cumbersome.

If you pay estimated quarterly taxes, exploring these strategies and workarounds can help taxpayers find a more manageable and strategic approach to fulfilling their tax obligations. Remember, proactive planning and strategic decision-making can make a significant difference in your overall tax experience.

Credit: d3sign/Getty Images

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Lee Reams II

Lee Reams II

CEO

I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.

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