As the year approaches its conclusion, taxpayers must be vigilant about the upcoming estimated tax deadline for fourth-quarter payments, set for January 15, 2025. Understanding this timeframe is crucial, as failing to meet this deadline can lead to unexpected penalties and the accrual of fees when filing the annual return. According to the Internal Revenue Service (IRS), estimated tax payments are particularly relevant for individuals earning income lacking withholding mechanisms, such as freelancers, small business owners, or investors. However, it is essential to remember that full-time and retirement income could also result in tax liabilities if insufficient withholdings have been made throughout the year.
It is easy to overlook that estimated taxes aren’t limited to freelance or business earnings. From year-end bonuses to stock dividends and capital gains, including those realized through cryptocurrency transactions, many sources of income may necessitate additional tax payments. The IRS emphasizes the importance of this obligation, creating a system where federal income taxes are assessed on a “pay-as-you-go” basis. This means taxpayers are expected to make periodic payments throughout the year relative to their earnings, preventing a large tax bill at filing time.
According to certified public accountant Brian Long, if the January 15 deadline is missed, individuals may face interest-based penalties. These penalties are calculated based on the current interest rate and the amount due, compounding daily until satisfied. This reality underscores the significance of making timely estimated payments. The IRS suggests that utilizing either tax withholdings, estimated payments, or a combination of both can mitigate the risk of encountering unwelcome surprises during tax season.
To alleviate some of the stress surrounding estimated taxes, taxpayers can take advantage of the IRS’s “safe harbor” rule. To meet this requirement, individuals must ensure that they’ve paid at least 90% of their current year’s tax obligation or 100% of what they owed in the previous year—whichever amount is lower. For those with an adjusted gross income (AGI) exceeding $150,000 in the previous year, the percentage adjusts to 110%. Such thresholds can be verified on line 11 of the 1040 tax form from the prior year’s return.
As the year-end approaches, many taxpayers will have a clearer picture of their annual income, which can assist in making the necessary adjustments to their estimated payments. Sheneya Wilson, a CPA and founder of Fola Financial, highlights that by this stage, most individuals should have finalized their financial figures for the year. One highly recommended strategy is to make estimated payments through the IRS online platform, which allows taxpayers to review their payment history and any pending obligations. Other payment options include the IRS Direct Pay system or the Electronic Federal Tax Payment System (EFTPS), and individuals can also opt for payments via debit or credit card.
In sum, as taxpayers navigate the complexities of the tax landscape, staying informed and proactive about estimated payments for the upcoming year is instrumental in avoiding penalties and ensuring a smooth tax-filing experience.