As summer begins to fade and leaves change color, September ushers in not just autumnal vibes, but also crucial deadlines and planning opportunities for individuals preparing for the 2023 tax season. Whether you’re an employee, self-employed, or receiving various income streams, taking proactive steps this month can significantly impact your upcoming tax return.
Tip Reporting for Employees: Hit the Mark by September 12th
If you’re an employee who earned more than $20 in tips during August, mark September 12th on your calendar! This is the deadline to report your tips to your employer using IRS Form 4070. Your employer will then handle withholding FICA and income taxes for these tips from your regular wages. Remember, failing to report tips accurately can lead to penalties and other headaches down the line.
Estimated Tax Payment Due: Stay Ahead of the Curve on September 15th
For individuals with income sources not covered by regular withholding, like self-employed individuals or those with investment earnings, September 15th marks the due date for the third installment of 2022 estimated taxes. Keeping up with these payments throughout the year helps avoid the underpayment penalty – a not-so-pleasant surprise anyone wants to avoid.
Penalty-Proof Your Payments: Understanding Safe Harbor Rules
The “pay-as-you-earn” system is the backbone of our tax system. To ensure everyone contributes their fair share throughout the year, the government offers safe harbor prepayment methods to avoid underpayment penalties. These methods essentially provide benchmarks for ensuring your estimated tax payments are on track.
There are two key safe harbors to remember:
- 90% of Current Year Tax Liability: If your estimated tax payments reach or surpass 90% of your anticipated tax liability for the current year, you’re in the clear!
- 100% (or 110%) of Prior Year Tax: Your safe harbor is 100% of your previous year’s tax liability. However, if your Adjusted Gross Income (AGI) exceeds $150,000 ($75,000 for married filing separately), this safe harbor jumps to 110% of the prior year’s tax.
Navigating Safe Harbors: An Example
Let’s say your estimated tax for the year is $10,000, and your total prepayments come out to $5,600. You still owe $4,400 on your tax return. The first safe harbor (90% of $10,000) shows you fell short, disqualifying you from penalty exemption under that rule.
But wait! There’s still the prior year’s safe harbor. If your prior year’s tax was $5,000, your prepayments of $5,600 actually exceed 110% of that amount (110% of $5,000 is $5,500). Congratulations, you qualify for this safe harbor and dodge the penalty bullet!
This example highlights the importance of monitoring your prepayments throughout the year, especially during periods of income fluctuation. Large bonuses, property sales, retirement income, and significant investment gains can all necessitate adjustments to your estimated tax payments to guarantee smooth sailing come tax season.
Planning Beyond September: Taking Control of Your Tax Future
While September offers crucial deadlines and opportunities for individual taxpayers, remember that proactive planning can be your best ally throughout the year. Consider these additional steps to stay ahead of the curve:
- Regularly review your income and expenses: Keeping track of your financial inflows and outflows helps you anticipate potential tax liabilities and adjust your withholding or estimated tax payments accordingly.
- Seek professional guidance: For complex tax situations or if you have questions about deductions, credits, or specific strategies, consulting a qualified tax professional can provide valuable insights and ensure you optimize your tax situation.
- Start planning for 2023 early: Don’t wait until next September! Familiarize yourself with upcoming deadlines, potential changes in tax laws, and any adjustments you might need to make to your withholding or estimated tax payments based on your projected income for the year ahead.
By embracing these September tax planning opportunities and implementing ongoing strategies, you can confidently navigate the upcoming tax season and achieve financial peace of mind. Remember, taking control of your tax situation requires proactiveness, knowledge, and a little bit of planning – and September is the perfect time to kickstart your journey towards a smooth and successful tax year ahead.
Contact us today to discuss your individual tax situation and explore personalized strategies to optimize your tax outcome for 2023 and beyond.
