Thanksgiving marks the beginning of the holiday season and the time when we begin to think about family get-togethers, holiday gift sharing and parties.
But don’t overlook what comes right after the holidays: tax season. And don’t overlook a couple of things you can do now to avoid or reduce potential penalties on your 2014 tax return.
Under-Distribution Penalty – If you are over 70-1/2 years of age, don’t forget to take your required minimum distribution (RMD) from your IRA account; otherwise you could face a penalty equal to 50% of what you should have taken as a distribution in 2014. The RMD is based on your age and the balance of the IRA account on December 31, 2013. Please call this office for the distribution percentage for your age.
If you just turned 70-1/2 in 2014, you can delay your first RMD until 2015 (but you must take it by April 1). However, that means you will have to double up your distributions in 2015, taking the one for 2014 and the one for 2015. This may or may not be beneficial taxwise, depending on your tax brackets in each year. If 2014 was your retirement year, your income tax bracket may be higher than it will be for 2015, so it may be advantageous taxwise to delay the 2014 distribution until 2015.
Underpayment Penalty – If you are a wage earner and have not been having enough income tax withheld from your paycheck to meet your tax liability for 2014, or if you also have taxable income from other sources, you may be facing the possibility of underpayment penalties. If your advance payments toward your 2014 tax liability, through withholding and estimated tax payments, are less than 90% of your 2014 tax liability or 100% (110% for high-income taxpayers) of your prior year tax liability, you will be hit with an underpayment penalty. There is no penalty if your tax liability is less than $1,000. The underpayment penalty is figured on a quarterly basis, so making an estimated tax payment late in the year will not reduce the penalties from earlier in the year. However, wage withholding is deemed paid evenly throughout the year, allowing you to mitigate underpayments earlier in the year by increasing your withholding late in the year. If your state has a state income tax, be sure to consider whether you also need to adjust your state income tax withholding to offset under-withholding earlier in the year to avoid or reduce a state underpayment penalty.