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4th Quarter Review of Estimated Taxes

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By Amanda L. Richter, CPA

The U.S. tax system is a pay-as-you-go system, which means that individuals must make four quarterly installment payments (due on April 15th, June 15th, September 15th and January 15th) of estimated tax based on the amount of his/her “required annual payment” to avoid an underpayment penalty. The required annual payment is the lesser of:

  • 90% of your tax bill for 2018, or
  • 100% of your tax bill for 2017 (110%, for higher income individuals).

While you may not view it as major disaster if you owed some money when you filed your return – after all, you would rather have the use of the funds for as long as possible and hope to earn interest or invest the funds. But what you want to avoid is having to pay the Internal Revenue Service (“IRS”) a penalty for underpaying your taxes during the year. If you owe the estimated tax underpayment penalty, which is nondeductible, you are in effect paying the IRS interest for part of the money you should have prepaid during the year for taxes, but did not. On the other hand, if you received a large refund on your prior year return, you essentially made an interest free loan to the government – something you may want to avoid this year. If that happened, you should consider reducing the amount of withholding taken from your wages and/or the amount of estimated tax payments you make.

Let’s go over a few basic rules:

  • For 2018, there is no estimated tax underpayment penalty if your tax due on the return (total tax less withholding) is less than $1,000, or if other specified exceptions or waivers apply.
  • If the amount you owe on your individual return is $1,000+ after factoring in your withholding, the estimated tax underpayment generally will not apply if you have met your required annual payment.

Here is an example: Let’s say your 2017 tax bill was $10,000 and your tax bill for 2018 will be $20,000. You will need to prepay $10,000 during 2018 in order to avoid the underpayment penalty. (90% of 2018 tax liability = $18,000 and 100% of 2017 tax liability = $10,000. The lessor of the two is $10,000)

What happens if your 2018 tax bill is expected to be lower? Take the same scenario for 2017 but now your 2018 tax bill is $5,000. In this scenario you will need to prepay $4,500. (90% of 2018 tax liability = $4,500 and 100% of 2017 tax liability = $10,000).

Now that we are in the 4th quarter and the extended due date for individual returns (October 15th) has now passed, it’s time for a checkup! You already know what your 2017 tax liability was but you may not be quite sure what your 2018 tax bill will be due to all of the new tax law changes that went into effect this year. At Hook Law Center, we can assist you with projecting what your 2018 tax liability will be based on your current financial picture in order to help you determine whether or not changes should be made to your 4th quarter estimated tax payment. If you decide you want to tackle this on your own, make sure you review our Publication on the Tax Cuts and Jobs Act of 2017 that was issued earlier this year so that you can familiarize yourself with the new changes that will impact your 2018 return including higher standard deductions and the elimination of personal exemptions.

Kit KatAsk Kit Kat – Animal Intelligence

Hook Law Center: Kit Kat, what can you tell us about animal intelligence? I’ve always heard dogs are smarter than many other animals. Is that true?

Kit Kat: Well, there is some interesting new research from Great Britain that indicates some  refinement in what is known about animal intelligence. Stephen Lea, an emeritus professor in psychology at the University of Exeter, England, has recently published in the journal Learning & Behavior about his recent study on the subject. The study compared  dog cognition among three different groups: carnivores, social hunters, and domestic animals. Some of the animals they considered were wolves, cats, chimpanzees, dolphins, horses, and pigeons. The result: “dog cognition does not look exceptional.” What is meant by that is that there are many animals that display intelligence, however, they may not be as affectionate as dogs.

Some of the examples Dr. Lea cites are in the fact that dogs, unlike dolphins, New Caledonian crows, and chimpanzees, cannot use tools. Chimpanzees have been observed to use plant stems to dislodge termites in a piece of wood. Homing pigeons are trained to return home, even when it involves flying hundreds of miles in unfamiliar territory. “Far be it for me to suggest that pigeons are smarter than dogs; they are not intellectual giants. But if you want to get 1,000 miles, I trust a pigeon over a dog.” Horses, too, can perform complicated tasks. And cats—they have been known to return to their original home, even if lost several hundred miles away.

Dogs do stand out, according to Dr. Clive Wynne, the director of the Canine Science Collaboratory at Arizona State University, in their capacity for affection. He comments that Dr. Lea’s study is not negative about dogs, but that actually “he is putting them in context.” Dogs are intelligent, but just not any more so than a host of other animals. (Laura M. Holson, “Your Dog May Be Smart, but She’s Not Exceptional,” The New York Times, Oct. 8, 2018)

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Posted on Monday, October 22nd, 2018. Filed under Senior Law News.
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