As a general rule, a reliable estimate of your taxes is the amount withheld from your paychecks by your employer. As you plan ahead for your taxes this year, tax estimates during the pandemic may not be quite so reliable, especially if your financial situation has changed.
You may have written the IRS a big check for your estimated tax payments (both due on July 15th this year). If your financial situation has changes it may be worth checking to see if you need to make a 3rd or 4th quarter estimated tax payment.
So, when you file your taxes for 2020, how can you be sure that you won’t be faced with a big tax surprise because either there wasn’t enough taxes withheld from your paycheck or your estimated tax payments were not enough? Below is 5 steps you can take.
- Estimate your 2020 income. Calculate all forms of your expected income for 2020. This will include your W-2’s, unemployment compensation, business income interest and dividend income, etc.
- Estimate your 2020 deductions. Calculate your estimated deductions for 2020. This may include retirement and health savings account contributions, student loan interest you paid, and your itemized deductions. You can always review your 2019 tax return and use some of those figures if you’re not sure.
- Estimate your tax. Find your taxable income and subtract your deductions. Next, based on your taxable income, estimate the tax you will owe using the IRS tax tables. If you don’t have a tax table, visit the IRS website.
- Add up your remaining estimated tax payments. Using the tax in step 3, subtract the amount you paid for your 1st and 2nd quarter estimated tax payments as well as your paycheck withholding for the year. If you owe more than the amount you paid in, you will have 2 more quarters to pay the difference in your estimated tax payments.
- Mail your estimated payment to the IRS. The due date to make a 3rd quarter estimated tax payment is September 15, 2020. The 4th quarter deadline is January 15, 2021.
By planning now you can avoid the big surprise of an unwanted tax bill on April 15, 2021. At Summit CPA we offer multiple resources to assist you with all of your tax and financial planning needs. Contact our office at 866-497-9761 to schedule an appointment with our advisors.