What is normally a reliable estimate of your taxes – the amount of money withheld from your paychecks by your employer – may be an unreliable estimate this year thanks to the current pandemic. Even worse, using the safety net of paying in what you did last year may not be practical if your financial situation changed due to the coronavirus.
Many taxpayers wrote a large check to the IRS this year for the very first time to pay a portion of their taxes as the 1st and 2nd quarter estimated tax payments for 2020 were both due on July 15. Because of this it may be beneficial to review whether you need to make a 3rd quarter or 4th quarter estimated tax payment in the coming months.
Here’s how to ensure you are not faced with an unpleasant tax surprise – because either not enough money was withheld from your paychecks for income tax purposes or your estimated tax payments were too small – when you file your 2020 tax return next April.
- Step 1: Estimate your 2020 income. Add up your anticipated income for 2020 – W-2 paychecks, unemployment compensation, business income, interest and dividend income and any other form of income.
- Step 2: Estimate your 2020 deductions. Add up your anticipated deductions for 2020, including retirement and health savings account contributions, student loan interest you paid and itemized deductions. If you’re not sure, take a look at last year’s tax return and use that figure.
- Step 3: Calculate your tax. Subtract your deductions from your income to calculate your taxable income. Then calculate the tax you owe based on your taxable income using the IRS tax tables. Use last year’s table until the new one is published later this year. Here is a link to the IRS publication: IRS tax table
- Step 4: Calculate your remaining estimated tax payments. Take the tax calculated in Step 3 and subtract any 1st and/or 2nd quarter estimated tax payments you made, and any paycheck withholdings so far this year. If you owe more than you have paid in or have had withheld so far this year, you have two more quarters to make up the difference through estimated tax payments.
- Step 5: Mail your payment to the IRS. The due date to make a 3rd quarter estimated tax payment is September 15, 2020. The 4th quarter deadline is January 15, 2021.
Sound complicated? It definitely can be. If you get stuck trying to figure out if you should make estimated tax payments or have any other questions, please call. Remember, it is better to plan now than to face the unpleasant surprise of an unwanted tax bill on April 15th.