Penalties and interest from the IRS await if you underpay your tax obligation throughout the year. With the 2023 first-quarter estimated tax payment due date of April 18th getting closer, here are some tips to help you avoid giving any more money to the IRS than you need to in 2023:
• Use the safe harbor. Because of the more than 500 pages of tax code changes, it may be best to use the safe harbor option that uses last year’s taxes as a basis for this year’s estimated tax payments. The safe harbor says that as long as your 2023 tax payments are at least 100% of your 2022 tax obligation, you won’t face an underpayment penalty. This is true even if you end up getting a bill from the IRS after filing your return next year. The good thing about this option is that it’s simple. Just look at what you paid last year and do the same this year. The downside is that if you owe less this year you will be owed a refund that may take some time to arrive.
• Be careful if your income is expected to be more than $150,000. In this case your 2023 safe harbor payments must be 110% of your 2022 tax amount versus 100% to avoid an underpayment penalty.
• Get your estimated payment calculated. You can calculate your estimated payments based on what you expect to earn in 2023. As long as your estimated payments are at least 90% of the actual tax obligation you report on your 2023 tax return, you won’t face an underpayment penalty. Consider using this option if you expect your income to be the same or lower than last year. It gets harder to make the correct adjustments to your quarterly estimated payments the greater your forecasted income for next year is compared to 2022.
Taking the time to calculate your 2023 estimated tax payments now will help you avoid any surprises at tax time next year.
One of my primary objectives is to help you achieve your financial goals through a holistic approach that is tax-efficient in my wealth management and tax resolution practice. For more information, visit www.fredtfoxiii.com
Fred T. Fox III lives in Lawton and owns his own business.