Avoid Costly Surprises for Those with Nonwage Income
If you have nonwage income that is not subject to withholding, you’ll probably owe some tax. If so, you are required to pay this tax to cover your tax liability through quarterly estimated tax payments or face underpayment penalties and interest.
Here are some tips on how to avoid estimated tax underpayment penalties at the end of this year and minimize the burden of quarterly taxes for 2014…
Nonwage income includes…
- Interest and dividend income
- Capital gains
- Business income
- Rental income
- Gambling winnings
- Taxable distributions from an IRA or pension plan
- Social security benefits
- Other income from non-wage sources
When you expect to owe $1,000 or more when you file your tax return, you should pay estimated taxes.
To avoid underpayment penalties, estimated tax payments must be large enough so that when combined with wage withholding they total at least…
- 90% of the tax shown on your current individual income tax return, or
- 100% of the tax that was shown on the prior year (110% if the prior year’s adjusted gross income exceeded $150,000 on a single or joint return, $75,000 if married filing separately).
The estimated taxes are generally paid in four quarterly estimated tax payments of equal size with due dates of April 15, June 15, September 15 and January 15 of the following year.
The penalty for underpayment is the IRS interest rate, which changes quarterly and is 3% for the second quarter of 2014. Payments are made by filing the IRS Form 1040-ES voucher, Estimated Tax for Individuals, or electronically through the IRS’s Electronic Federal Tax Payment System (EFTPS).
With the high cost of medical care more people are now able to deduct on their tax return unreimbursed medical expenses. If you plan to claim a deduction for your medical and dental expenses you must be able to itemize your deductions on Schedule A and your medical and dental expenses must exceed 10 percent of your adjusted gross income (the threshold is 7.5% if you or your spouse is age 65 or older and this exception will apply through 2016.)
Even if your medical and dental expenses were incurred in a previous year and paid in the current year, you can still deduct them in the current year as long as you have accurate records of those expenses. Include medical and dental expenses you paid for yourself, your spouse and your dependents. There may be some exceptions that apply, such as, expenses reimbursed by insurance or other sources don’t qualify as a deduction.
Deductible medical and dental expenses must be mainly for diagnosing, treating, easing or preventing disease. Medical expenses include…
- Doctors and dentists
- Prescription medicines
- Qualified long-term care services
- Medical insurance premiums
- Eyeglasses, equipment and supplies
- Limited amounts for qualified long-term care insurance
- Transportation costs to and from medical care, the deduction is 24 cents per mile for 2014.
No double dipping. If you have paid your medical and dental expenses with monies from your Health Savings Account or Flexible Spending Arrangements, you can’t deduct the amounts paid from those plans.
Create estate tax savings by giving a minority interest in your business to family members. For estate tax purposes the value of a minority interest in a closely held business is often discounted 30% to 40% due to the lack of marketability and lack of management control.