Episode 35: Do I Need to Start Making Estimated Federal Income Tax Payments?

Isaac Wright: Well, welcome back here to the year-end edition of Wright Money Tips. We want to say thank you for always tuning in, watching our show, listening to our podcast, or all the above. You know, over the last couple months, you’ve probably heard me talk a little bit about some of the checklists that we’ve created to be able to provide value if you have any questions related to a death of a parent, a marriage.
Well, today we’re going to talk about a big topic that a lot of people have concerns with: How to file quarterly or otherwise estimated taxes. This will be a really good topic, Aaron, because we’ve seen a lot of people get misconstrued with this. And everybody, if you don’t know, Aaron Reed is one of our lead advisors here at Financial Dynamics.
So, we’re going to kind of chat about this. But before we get off the ground today, just know if you have a question about whether or not you should be filing estimated tax payments, we do have a flow chart that can help you determine whether or not that makes sense for you to do. And I’m always going to preface this with, please check with your tax accountant, preparer, or anybody that does your taxes.
What we’re going to cover today is general in nature, and this is what I would call, the general advice of what to do. But again, if you have any specifics, you can reach out to us. We’re happy to talk with your accountant or a tax advisor. But with that being said, Aaron, glad to have you on the program today.
Aaron Reed: Thanks for having me today, Isaac.
Isaac Wright: Yeah, so let’s go and just get off the ground here. You know, here’s the issue you and I see this all the time. Somebody retires and they’ve worked 30 some years and they’ve had a payroll check, and all the payroll money that they’ve ever had in their life has had tax withholdings.
They figure out their W-4. Then they retire. Then they get Social Security. They may have to start pulling money from their investments and all of a sudden that whole system has been uprooted and then they don’t really know, and sometimes, unfortunately, make a mistake of not even paying their taxes.
So why don’t we just start there and let’s talk a little bit about when should somebody generally be concerned about filing for an estimated payment versus a tax withholding from a payroll check per se.
Aaron Reed: So, kind of as a general rule of thumb, if you had a tax liability in the previous year that was over, I think around a thousand dollars, and you’re not having your W-2 income withheld, just like someone, like you just said, that retired. Then it may make sense to look at paying quarterly, monthly, you know, estimated payments.
Isaac Wright: Yeah, and I’m glad you said that because people hear the term. In fact, I probably let off with the show of quarterly estimated payments. But just to be clear, when the income comes in, you know, you can do it monthly. You don’t have to wait till the end of the quarter. Am I saying that correctly?
Aaron Reed: It’s due by the end of the quarter. But you can split it out monthly if that makes more sense for you.
Isaac Wright: Yeah. And you know, we’re talking about, you know, again, maybe not just the evaluation of ongoing income, but you know, we see this quite often when somebody has a large amount of money come to them at once, a windfall, if you will.
Aaron Reed: And then that creates a, a situation where the following they’re looking at having to pay the IRS may make them pay quarterly estimates or quarterly taxes because, because they had a tax liability the year before. Or if you had a capital gains the year before, you know, when you have a big year in the market, a lot of times clients or people will come in and say, “I’ve never had to pay quarterly estimates before, why am I having to pay them now?”
Isaac Wright: So, this is probably good to chat about because, you know, this year the stock market’s been under a lot of stress as you already know. But last year and maybe the year before that a lot of people were making a lot of money in the market and having to pay a lot of capital gains.
That’s when the following year they have estimated tax payments because they’re kind of estimating what the taxes will be based on that income. And as you all probably know, if you’re pulling money from a taxable account or investments and they’ve gone down 20% value, and I’m just using that as an artificial term, but you follow what I’m saying. Now you’ve paid these quarterly estimates and maybe need to check with your accountant, and you may be off the hook completely with having to pay any of that.
Aaron Reed: I’ve seen that a lot this year, particularly because exactly like you said, somebody had a big capital gain last year and now they’re on quarterly estimates based off of that gain that they had last year that they’re not going to have this year.
Isaac Wright: Yeah. So, it’s important and I know this is what we do as part of our value add and our team here at Financial Dynamics. A lot of times through the middle of the year or middle end of the year, and we’re getting to now obviously the end of this year, but this is great to chat about for 2023. Having at least some recognition of if you had a large windfall of income from capital gains or you know, just a sale of an asset in general, you may be in a scenario where you don’t want to have to pay these estimates any more than you have to. And sometimes, I would love to say that the accountant is the one that finds that, but unfortunately, they normally are doing the tax preparation about what’s already occurred. We’re nine times out of 10, the ones that kind of see it first and kind of have to do the planning and reach out.
Even though this program is titled, When to File Estimated Tax Payments, I think it’s important to know there’s so much more involved with that terminology. It’s about making sure, again, Uncle Sam is not taking you for a ride or you’re asking for a refund of a large amount of money that you had already paid that you didn’t have to pay in the first place.
Aaron Reed: Yeah, absolutely.
Isaac Wright: Aaron, anything else? I’m going to just turn it over to you, man. What are some other things that, let’s call it in the realm of estimated payments that you’ve seen or anything that’s on our spreadsheet, our workflow item that would be helpful for people today?
Aaron Reed: Just reviewing your W-4. Making sure that you’ve got your withholdings set properly so you don’t get in a situation where you have to pay quarterly taxes, which that’s not the end of the world. But you know, I find that for most people, they’d just rather have the withholdings and then settle up at the end of the year. And if you got your withholdings set up correctly, then it’s going to be pretty close to being a wash at the end of the year.
Isaac Wright: Yeah, and I think especially if you are in a situation where you have multiple income sources, multiple jobs, things along those lines, and I know Aaron, again, you and I see this together, but I think mostly you want to make sure that you do, if again, if you’re getting a large amount of money back or you owe a large amount of money, you should revise your W-4, which would be your withholdings off of the income coming in. Now, that can also by the way, if you do that correctly, that may eliminate the estimated payments.
Again, please know that this is a moving target every year I would almost say. But these are just true items that we have found to be, again, general in nature, but specific enough to say, “Hey, these are things to consider.” Again, if you have any concerns about paying estimated tax payments, Aaron, any of us are here to help you. We can reach out and send you a copy of our Estimated Tax Workflow, which is a really nice checklist in a way of being able to know when and how to maybe avoid paying those estimated taxes.
You know, Aaron, outside of the world of estimated taxes, just taxes in general. You know, we’re, we’re probably at a 0.2 where I would say, you know, as we go into 2023, people just need to be familiar with the amount of money they can put into a retirement account, their 401(k)s. I said this on our last program, but interest rates have gone up so much. Does it make sense to reconsider, or especially if you have high interest debt, paying some of that debt down versus putting so much into your retirement accounts? 12 months ago, interest rates were at 1% and now you see where they’re at today. So again, that all factors in it.
Aaron Reed: It does, absolutely. And, and also something to think about in a year like we’re having so far, if you’ve been holding non-qualified stocks or non-qualified investments, possibly could harvest a loss this year. I know that doesn’t necessarily sound like something that traditionally you want to do, but sometimes it may make sense to sell a security at a time like this and reposition it or diversify it a little bit more. It may be an opportunity to get out of a position that you otherwise would’ve had to pay a huge gain.
Isaac Wright: Yeah. So, listen, I know we’re throwing a little bit of extra at you here at the end of the program, but hopefully over the course of this year and last year and just in general, that Wright Money Tips has been something that’s been nice to listen to for a 10, 12, 15-minute ride to and from. But just know we’re always here to help. And from Aaron and I, we want to thank you for watching, listening and viewing Wright Money Tips. And until next time, we’ll talk soon.
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