In the next few weeks you could add thousands of dollars to your net worth. Market volatility and new tax rules give you the best opportunity in years to reduce your income taxes with year-end moves. Here are some actions to consider between now and Dec. 31 to slash the amount you owe Uncle Sam.
Now is a good time to see if your estimated tax payments will be enough to avoid penalties. You avoid penalties if the estimated taxes equal either 100% of last year’s taxes or 90% of the taxes due for this year. You generally are supposed to pay the estimated taxes in equal installments. So if your estimated payments have been too low, you cannot avoid penalties for earlier in the year by increasing payments now. But increasing payments now will stop additional penalties from being incurred.
You also might avoid all penalties by using the “annualization exception” to the requirement for equal estimated tax payments. You can use this exception if your income varied during the year. This might occur when you take IRA distributions irregularly or had large capital gains at some point. If the amount of your estimated payments matches the quarterly variations in income, then you might avoid penalties. Details are on Form 2210, Schedule A and its instructions.