Time for a “Spring Tax Checkup”…for those key Clients !

If you want help your KEY clients avoid having to pay the IRS a penalty for underpaying their taxes this year… you may need to contact them for “tax lunch checkup”…

Good for client relations….and great for client “peace of mind”…

Here are basics…If your client is having a great year and may owe additional tax this year…an estimated tax underpayment penalty might apply and is non-deductible. Ouchhhhh!

On the other hand, if they got a big refund on last year’s return, you made an interest-free loan to the government — something you may want to avoid this year.

Here are some estimated taxes pointers you may want to discuss with them as you catch up…over lunch.

First… There is no estimated tax underpayment penalty for the 2016 tax year if the total tax on their return reduced is by withholding (but not by estimated tax payments) is less than $1,000. If the amount owed on an individual income tax return comes to $1,000 or more after subtracting withheld tax, the estimated tax underpayment penalty generally won’t apply if your “required annual payment” — i.e., the amount that must be prepaid during the year in the form of withheld tax and estimated tax payments — equals at least the smaller of two amounts:

1. 90% of your tax bill for 2016, or
2. 100% of your tax bill for 2015.

For example, let’s suppose your client’s tax bill for 2015 was $10,000, and their tax bill for 2016 will come to $20,000 (90% of which is $18,000). In this case, they must prepay at least $10,000 of your tax bill during 2015 to avoid the underpayment penalty. On the other hand, if the tax they will owe for 2016 is only $10,000, they will have to make timely estimated tax payment of only $9,000 for 2016 to avoid the penalty.

A tougher rule applies if your client had adjusted gross income for 2015 exceeded $150,000 ($75,000 for married persons filing a separate return). During 2016, to avoid the underpayment penalty, they would be required to prepay the smallest of (1) 90% of the tax for 2016, or (2) 110% of the tax for 2015.

Note that the IRS can waive an underpayment penalty if your client didn’t make the payment because of a casualty, disaster, or other unusual circumstance, and it would be inequitable to impose the penalty. The penalty also can be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

Second… In general, one-quarter of your client’s tax is required to be paid as an annual payment. It must be paid by April 18, 2016, June 15, 2016, September 15, 2016, and January 17, 2017. Keep in mind that tax withheld from their salary is treated as an estimated tax payment, and that an equal part of withheld tax generally is treated as paid on each installment date.

Your client may be able to make smaller payments under the annualized income method, which is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. They may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.

Time to set up that tax appointment… Although you may now know what clients   2015 tax bill came to, you probably don’t quite know where their 2016 tax will be. While it can’t be predicted with absolute certainty, you may be able to estimate what it may come in at if you have more facts.   Time to ASK! It would be a good idea for you to call that key client before June 15, 2016 and start looking at their withholding and/or estimated tax payments. Keep in mind that your review is a great way to help reduce overpayments and keep your client well informed about the tax cost built into all their 2016 expansion decisions. Do it now so you can make some ‘mid-course “corrections…before it is too late.

You should also review whether changes in their personal or financial situation require a change in estimated tax payments or withholding.

Such as…..

• If one of their children graduated college in January and is working and supporting himself, they will have one less dependency exemption deduction for the year and may need to file a new W-4 to increase withholding.
• If they are  anticipating  having substantial investment income in 2016, they may be subject to the net investment income tax (NIIT), a surtax equal to 3.8% of the lower of their net investment income or the excess of your modified adjusted gross income over a threshold amount (e.g., $250,000 for joint filers or surviving spouses). The NIIT may need to be included when you figure their estimated tax for 2016.
• If they intend to retire mid-year, they may wind up in a lower tax bracket for the 2016 tax year and may want to reduce your withholding.
• An IRA-to-Roth-IRA rollover results in taxable income. If they intend to make such a rollover this year, the income from it must be included in estimated tax calculations.
• Time to call and catch up on that special client that may need a little extra help…it will be much appreciated.

Have a great Spring and now work on all those extensions…Good Luck