Posted May 2015
What do taxes and hockey have in common? You may be subject to penalties and you may be able to block that shot.
Continuing from Friday's post, I was asked how do you know how much is enough to send in via estimated taxes. And how do you avoid those dang penalties?
In hockey, the player skates down the ice, trying to score a penalty shot, while the goalie is there trying to block it. The IRS is trying to score that penalty on you, which you want to block.
The simplest method to avoid underpayment penalties is to have paid in an amount that equals or exceeds the prior year's tax (known as a Safe Harbor method, there are variations on this).
Let's say that your 2014 tax was $2,000. If you pay in at least $2,000 via withholding and estimates, you are protected. Even if you owe $100,000 for 2015 because you won the lottery. when IRS comes skating down the ice, you will be able to successfully block that penalty shot because you met an exception to the penalty calculation.
Now calculating your 2016 estimated taxes will be more difficult, because unless you plan on winning the lottery again, you certainly don't want to pay in that much in tax in advance.
And that's where having a CPA in your corner will help you. Call me if you have questions.