Estimated Taxes

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.


  1. Paying more taxes than you have to.  Keep good records so you get all the deductions you’re entitled to.  Shift income to a year when you’ll be in a lower tax bracket.  Shift deductions to a year when you’ll be in a higher tax bracket.
  2. Not preparing for the unexpected.  Set aside at least two months income to protect yourself and your family from serious cash flow problems in the event of an emergency.
  3.  Not putting your money to work.  Take all excess funds out of no-interest or low interest checking and savings accounts.  Put the money to work in liquid but higher yielding places such as mutual funds.
  4. Not setting financial goals.  If you don’t have goals, you can’t make a plan to achieve them.  Write down where you want to be and when.  Then start making a plan.
  5. Making investments based on tips.  No matter how well-intended, a tip is the worst reason to make an investment.  Investment decisions made under pressure are also unwise.
  6. Failing to have your will updated.  Your situation changes along with that of your heirs.  Your will should always reflect your present circumstances.
  7. Not establishing credit in the name of each spouse.  No one likes to think about death or divorce, but not having credit can be much more than a minor inconvenience.
  8. Borrowing money when it’s not necessary.  Not all interest is fully deductible.  Interest deductions have been sharply curtailed.  Don’t assume tax benefits when you consider borrowing.
  9. Not keeping organized financial records.  Poor recordkeeping can cost you significant tax savings, cause you to make bad financial decisions, and leave your family with unnecessary problems if you become ill or die.
  10. Failing to put a yearly tax plan to work as early as possible.  Year-end tax planning can be costly.  The sooner you put your tax plan to work the greater your savings.


Retirement planning tax tip.  Even if you don’t receive a deduction for your retirement plan contribution, you still obtain a tax savings from a contribution because the income or gain that you realize in your retirement plan is tax deferred.  You also gain the additional benefit of having the retirement plan’s income or gain grow on a tax deferred basis over the period of time the funds remain in the retirement plan.


Do it now.  Adjust your 1999 withholding tax payments so that by the end of the year, they will equal your expected 1999 income tax.  This is the safest and best way to make sure that you will pay the required amount of taxes during 1999 to avoid IRS underpayment penalties.


When you sell your principal residence, you can exclude from income up to $250,000 of gain and $500,000 on a joint return.  Ownership and use tests must be met.  But if you’ve been taking a home-office deduction because you used part of your home for business, the IRS will consider part of the house sale as a sale of business property.  That means you’ll have to pay taxes on the portion of the gain which is allocated to the part of the house you used for business.

You can avoid this problem if no part of your house qualifies for a home-office deduction during the year the sale is made.  If you make sure that it’s obvious that your home office space is used for non-business purposes, it won’t qualify for the home-office deduction.  The sale will not be treated as a partial sale of business property and 100% of the sales proceeds will qualify for deferral of taxes on the gain.


Investment interest expense deduction.  Investment interest expense, such as margin interest, is deductible, but is limited to the amount of taxable investment income that one has.  Interest income and dividend income is investment income, but not tax favored capital gains.  Unused investment interest expense can be carried forward to future years.  Tax strategy:  To get a deduction now for unused investment interest expense you can elect to treat a portion of tax favored capital gains and dividends as income taxed at ordinary rates,  then the unused investment interest is deductible against it.


Section 529 college saving plans offer income tax, gift tax, estate tax, and asset protection benefits.  But, in spite of all the hype and publicity (which they do deserve), 529s aren’t for everyone.

If you’re on either end of the wealth spectrum, there may be better options, which are often lost in the marketing barrage for 529 plans.  While 529s may be great for most people saving for college, it depends on your specific situation…

You’re on the low end of the income/wealth spectrum.  You might be better off keeping the money in your name.  You might need the money for yourself.  From an emotional perspective, you may not want to have your child see 529 money that he/she will assume is for college only to see you pull it out to meet a family emergency.  Also:  Your tax bracket may not be so high that the tax advantages of a 529 account are that significant.

You’re on the high end of the income/wealth spectrum.  You might benefit your family more if, as part of an overall financial, asset protection, and estate planning strategy, you establish trusts for your children and grandchildren to which you can gift interests in family businesses or investments at a discount, fractionalize ownership of family entities by these gifts, remove future appreciation from your estate, and achieve other goals.  You can, at these levels, always pay for tuition costs directly gift tax free over and above the annual gifts you can make to the trusts (currently $14,000/year)

Lesson:  529 plans, like most estate and financial techniques, are a wise choice for some people, but not for everyone.  Use discretion to be sure you’re taking the steps that are right for you.


Under certain circumstances, you can deduct the cost of looking for a job as a miscellaneous itemized deduction up to the amount your total combined miscellaneous deductions exceed 2% of your Adjusted Gross Income.  To deduct job-hunting costs, you must be looking for employment in the same or a related field of work.  If you satisfy the requirements, here are some of the costs you can deduct.

  • The cost of transportation to and from job interviews. 
  • 50% of the cost of meals and entertainment which you incur because of your job search. 
  • The cost of out of town travel to seek new employment, including transportation, lodging, and 50% of meals and entertainment. 
  • Fees that you pay to job counselors, recruiters, and employment agencies. 
  • The cost of newspapers and other publications that you buy because of their employment advertisements. 
  • The cost of preparing and mailing resumes, including printing, envelopes and postage. 

Even if you don’t find a new job, you can still claim these deductions.