How can I avoid interest and penalties on my taxes?
How can I avoid interest and penalties on my taxes?
Filing a tax return will reconcile what we paid toward our tax liability during the year and the actual amount of the tax due for the year. If we paid more than we needed to pay, we get a refund. If we paid less than was needed, we must pay the difference by the filing deadline, normally April 15. If the amount we need to pay is $1,000 or more, penalties and interest may be charged if neither of two “safe harbors” have been met.
Line 33 of a tax return is the “Total Payments” and is comprised mostly from the amount withheld for taxes at any point during the year from paychecks or retirement account distributions. But for workers not receiving W-2 income or taxpayers who receive interest, dividends, or other income that does not allow withholding, estimated payments must be made by the taxpayer.
Estimated payments are often referred to as “quarterly payments” or “quarterly estimated payments,” even though they are not spread out exactly three months apart. These payments are normally due April 15, June 15, September 15, and January 15.
To be protected from penalties, you only need to meet either the prior-year or current-year “safe harbor.”
Prior-Year Safe Harbor
- If you pay via withholding and/or estimated payments made on time, an amount totaling at least 100% of your previous year’s total tax liability (last year’s Line 24 – Total Tax), then you generally won’t face underpayment penalties.
- If your household’s Adjusted Gross Income (AGI) in the prior year was over $150,000 (or $75,000 if married filing separately), you must pay 110% of your prior year’s tax to qualify for this safe harbor.
Say for example that the total tax from your 2024 tax return is $10,000. Thus for 2025, the total of your withholdings and estimated payments need only equal $10,000 to avoid a penalty. But if your household’s 2024 Adjusted Gross Income was $150,000 or more, the safe harbor percentage is 110%, so the total withholding and estimated payments made for tax year 2025 would need to be $11,000 to avoid an underpayment penalty.
Using the prior year safe harbor can be helpful if your 2025 tax bill is difficult to estimate or expected to be much higher than your 2024 bill. If you expect your 2025 tax bill to be significantly lower than your 2024 tax bill, the second safe harbor (current-year) may have appeal.
Current-Year Safe Harbor
- If you pay 90% of your current year’s estimated tax liability throughout the year, you can avoid underpayment penalties.
For example, say your 2024 tax bill is $200,000 due to a large gain on the sale of a piece of property. But in 2025, you expect only your normal wages of $100,000. If you withheld a large percentage of your wages and made estimated payments to meet the prior year safe harbor ($220,000 or more), you would get a huge refund when you filed your 2025 return. Refunds are essentially an interest free loan to the government on which you could have been earning interest yourself.
If instead you relied on the current-year safe harbor, you would need to only withhold from your $100,000 of wages and/or make timely estimated payments which total at least 90% of the 2025 tax bill. For households with steady income sources, it is not difficult to make a good estimate and avoid penalties and interest.
Other penalties
If you can’t meet the April 15 filing deadline, you can easily obtain an extension to file. However, this is only an extension to file – tax payments are not extended. If it looks like you may owe taxes, you should make a payment when you file for the extension. Even if you meet one of the safe harbors for the underpayment penalty, if such a payment is not made by April 15, you could be subject to a late payment penalty of .5% per month and interest (currently charged at an annual rate of around 7%).
The best way to avoid penalties and interest is to work with our tax experts.
The best way to avoid penalties and interest is to work with our tax experts. This is especially true when income is expected to change significantly from year to year. Our team knows the ins and outs not discussed above such as handling mid-year income spikes and the nuances of the withholding rules. They relish the chance to craft the best strategy for your situation.
Congratulations, Pam Grabe and Welcome, Kelley Emery!
Congratulations, Pam Grabe and Welcome, Kelley Emery! Pam Grabe is retiring at the end of February, after 17 years with this firm. She has done her work assisting clients and advisors with efficiency, effectiveness, and professionalism. As importantly, Pam is helpful and kind to everyone and makes this a great place to work. She will be dearly missed.
Pam has been training her replacement, Kelley Emery, since the beginning of the year. You’ll find Kelley at (407) 869-6228 ext. 106 and [email protected]
Pam says, “I am excited about this new chapter but will certainly miss my clients and the team here at Moisand Fitzgerald Tamayo LLC. I have enjoyed the relationships I have formed with my clients and wish them all the best in the years to come. I am confident you will be in good hands with Kelley, as she has over 20 years of experience and is friendly, dependable, and efficient. Thank you for the privilege of serving you!”
Making News…
We continue to help various media outlets provide sound information to their audiences. (Some links may require a subscription to view.)
Dan Moisand,CFP® continues to write for Florida Today and MarketWatch, which are sometimes syndicated to other sites such as YahooFinance.
What is the biggest money mistake people make? – MarketWatch
How do I make sure my retirement accounts go to my wife, and then my kids, when I die? – MarketWatch
In his most recent piece, DJ Hunt, CFP® shared the basics of financing an internal succession plan with readers of Rethinking65, a publication for financial advisors that work with retirees and nearly retired. DJ also was a key source to Barron’s for an article on how younger advisors are becoming owners in their firms.
In the News…
Florida Today highlighted some of the recent accolades for Moisand Fitzgerald Tamayo, LLC including our being named for the second year in a row to Forbes list of the 250 Top Registered Investment Advisor firms in America, being named for the 6th time since 2019 as one of the country’s Best Places to Work among financial advisory firms and Dan’s second inclusion on InvestmentNews‘ “Hot List” for advisors that have made an impact on the industry in the last year. Read the Florida Today write up here.
Moisand Fitzgerald Tamayo, LLC continues to contribute to the advancement of the financial planning profession with sponsorship of the Future Advisors Conference for UF’s Wealth Management program in January 2025. Also, In addition to our financial support of the event, Charlie Fitzgerald, CFP® served as one of three judges for the five-team Student Challenge.
If you are a member of an organization in need of a personal finance speaker, we are happy to talk with your group’s organizers about helping out at no cost.
Tommy Lucas, CFP®, EA was interviewed by Central Florida Public Media and the segment aired on 90.7 FM Orlando and 89.5 FM Ocala. Click the following link to listen to the interview or read the transcript: “Ease tax stress: Orlando financial advisor shares preparation tips.”
Tommy provided financial tips and assisted CNBC reporters on the following topics, a couple of which were syndicated to NBC affiliates:
This is the best tax bracket for a Roth IRA conversion, advisors say – CNBC
This is the best tax bracket for a Roth IRA conversion, advisors say – NBC 5 Dallas-Fort Worth
Notable
- 78% of near-retirees failed or barely passed a retirement Social Security quiz. (MassMutual)
- A survey conducted by Morning Consult and NEXT360 Partners revealed of women between the ages of 25 and 71, 63 percent said that caregiving has negatively impacted their financial goals.
- Reflecting the stressful nature of the work, 50% of caregivers reported they avoid travel for fear of their care recipient needing attention. (AARP)
