The Tax Cuts and Jobs Act (TCJA) passed in late 2017 made big tax changes, including to individual tax rates. If you are self-employed or retired and pay your taxes on a quarterly basis, calculating your new tax obligation is going to be a little more complicated than usual.
That's because it could be difficult to estimate your tax obligation under the new tax code, which eliminated personal exemptions, lowered tax rates, suspended many itemized deductions and created a new small business deduction. Worse still, penalties are still in place if you underpay your tax obligation.
Here are some tips to handle quarterly payments under the new code:
- Use the safe harbor. Because of the more than 500 pages of tax code changes, it may be best to use the "safe harbor" option, which is based on what you paid in tax last year. Under the safe harbor, as long as you withhold at least 100 percent of last year’s tax obligation, you won’t face an underpayment penalty (with an exception - see the next tip). This is true even if you end up underpaying and owing the IRS next year. Simplicity is the best thing about the safe harbor. Just look at what you paid last year, and do the same this year. The downside is that you may overpay and end up waiting for a larger refund to arrive next year.
- Take care if your income is expected to be over $150,000. If you cross the $150,000 threshold, the IRS requires your safe harbor payments to be 110 percent of last year's tax amount, rather than 100 percent.
- Get your estimated payment calculated. The IRS put up a withholding calculator on its website in late February that reflects the new changes. You can use it to calculate your estimated payments based on what you expect to earn in 2018. As long as your estimate for this year comes within 90 percent of your actual tax obligation, you won’t face an underpayment penalty. Consider using the estimate option if you expect this year's income to be the same or lower than last year's. If your income is expected to be much greater this year, it may be harder to make the correct adjustments to your quarterly payments. In that case, the safe harbor option may be your best bet.
Taking the time to make changes now will help you make a smooth transition under the new TCJA rules and prevent any surprises at tax time next year. If you have any questions or need assistance to determine your quarterly tax payments, please reach out for help.