Check to See If Your “Safe Harbor” Is Safe!
U.S. Taxes … Pay-As-You-Go
It’s no secret … The United States income tax system is “pay-as-you-go" … which means that you must pay income tax as you earn or receive your income during the year.
In that regard, taxpayers who expect to owe $1,000 or more must pay at least 90 percent of their taxes periodically throughout the year via withholding and/or quarterly estimated payments. Failure to do so may result in a tax penalty when filing the current tax year’s return.
Generally, taxpayers who are required to make estimated tax payments do so in four equal quarterly amounts to avoid a penalty. The remaining deadlines for paying 2022 quarterly estimated tax are: September 15, and January 17, 2023.
Safe Harbor Provision
So, what does this have to do with a “safe harbor?” The term refers to the IRS provision that estimates paid in the current year, which at least match what was paid in the previous tax year, will not be subject to penalty. Therefore, the safest option to avoid an underpayment penalty is to pay100 percent of your 2021 taxes by the end of tax year 2022.
You may be among the many investors that enjoyed significant investment gains last year. If so, you faced a dilemma when determining your 2022 estimated taxes. You may have tried to put yourself into the safe harbor for this year by paying taxes at a similar amount to last year. However, with the market conditions drastically different, you may be paying in too much that will not be refunded until filing time.
Portfolio Gains & Losses … May Be a Factor in Calculating Estimates
In reviewing your current investment portfolio, you may have suffered losses in the total value of your holdings this year compared to 2021. Those losses may fall into one of two categories:
• Unrealized losses … meaning “paper losses” that were not realized by the sale of your investment at a price less than what you paid. Unrealized losses will not affect your quarterly estimate payments.
• Realized losses … In contrast, sale of an investment for less than your purchase price will result in a realized loss and may affect your estimates for tax year 2022.
Now is the time to re-examine what you’ve paid in estimates for Q1 and Q2 of this year. In that effort, it is critical that you meet with your tax and financial advisors to determine:
• Any 2021 realized investment gains that may trigger an increase to your 2022 safe harbor calculations for the remaining two quarterly estimate deadlines … September 15, and January 17, 2023, and
• Realized losses (incurred or likely) in 2022 that may offset your estimates for the balance of this tax year.
This underscores the importance for both your tax and financial advisors to be “in synch” with past investment results as well as accounting and investing plans for the balance of this year.
If any of the foregoing seems unclear as to how it applies to your specific circumstances,
please keep in mind that Blair + Assoc will help. Give us a call or drop an email.