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Are You Subject to Underpayment Tax Penalties?

Here are a few ways you can protect yourself from penalties if you don’t pay enough tax throughout the year.

Know the minimum payment rules. Your estimated payments and withholding must equal at least 90% of your tax liability for 2014 or 100% of your 2013 tax. (110% if previous year AGI was over $150,000. Married but filing separately is over $75,000).

Use the annualized income installment method. This may be beneficial if you have large variability in monthly income due to investment gains and losses, bonuses or seasonal income. Annualizing computes the tax due based on income, gains, losses and deductions through each estimated tax period.

Estimate your tax liability and increase withholding. If you’ve underpaid, have the tax shortfall withheld from your salary or year-end bonus by December 31st. Withholding is considered to have been paid ratably throughout the year, whereas an increased quarterly tax payment may still leave you exposed to penalties for previous quarters.

McMullan CPAs can answer any questions you may have about underpayment penalties and how to avoid them.

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