As the end of the year approaches, you should think about whether you have paid enough taxes to avoid a penalty.
On the federal side, you’re fine if you’ve done one of two things.
The first option to avoid a penalty is to pay in 90 percent of your current year’s liability. If you owed a total of $10,000 in federal taxes this year and have paid $9,200 in withholding or in estimated tax payments, you’re good.
The second way to avoid being penalized is to pay in as much as your tax was last year. If your tax last year was $14,000 and you’ve paid $14,001, you’re OK.
But there’s an exception to this rule. It’s complicated, and the best way to be sure this exception doesn’t affect you is to check with a CPA.
If you haven’t met one of the two requirements—paying in 90 percent or paying what you paid last year—you still have time to act before Jan. 15. It’s worth the effort now to avoid the penalty.
My point is that you get absolutely no benefit for paying the penalty. It doesn’t save you any money, and it doesn’t save you any pain or angst.
If you haven’t met one of the two requirements, either you should have your employer withhold the needed amount, or, if you’re in business for yourself, make the necessary payments to the IRS.
You should accompany the payment with IRS form 1040-ES. The ES stands for estimate, and it’s due on Jan. 15, 2018.
Now is the time to start thinking about what to do. You can’t start thinking about it on Jan. 13 and hope that you’ve got enough money available to make a payment on Jan. 15.
If you don’t meet the required payment, your penalty for underpayment of taxes can be as high as 5 percent of the unpaid amount. You get nothing for it, except for a bill from the IRS.
As for state taxes, the state of Oklahoma only requires that you pay 70 percent of your tax liability by Jan. 15. If you’ve paid in the same amount as your tax was for last year, you’re good.
What’s important to consider about paying your state tax is that you can deduct it in calculating your federal taxes. The state tax is an income tax deduction.
You deduct it when you pay it. Although the due date is Jan. 15, 2018, I don’t want to pay my state tax then. I want to pay it Dec. 31, 2017, so I can deduct it on my 2017 tax filing.
As an accountant, I get really excited about the state income taxes. I don’t want you to come in on Jan. 2 to have me compute your tax liability and have to tell you, “You owe $5,000 to the state. You’ll get the deduction next year.”
Go ahead and write the check in 2017 and deduct it in 2017 so you get the tax benefit now.