One of the key things to year-end planning is to make sure you understand your tax payments.  This is not the sexiest of year-end planning topics, but it is one of the more important ones.  The first goal is to determine how much you might owe when the return is filed.  The second goal is to analyze the estimated tax payments.  The third is to save taxes with the timing of state payments.

Nothing is worse than an unexpected tax bill in April when you go to file your tax return.  That is one of the common reasons people become frustrated with their tax advisors.  An unexpected tax bill is why people dread filing their returns.  If you do planning in November/December, then at least you have five months to prepare for that tax bill that is due April 15th.  This year with the federal and Minnesota tax rates higher for high income taxpayers, planning for a tax bill in April is even more crucial.

It is important to make sure your estimated tax payments are enough to meet the safe harbor estimates so you don’t incur estimated tax underpayment penalties.  The underpayment penalties aren’t crazy high; they depend on the interest rates which are quite low at the moment.  Just the idea of paying the IRS a few dollars more is enough to make some people sick.  The safe harbor means that if your AGI was over $150k, then 110% of your prior year tax needs to be paid quarterly.  If your AGI is less than $150k, then only 100% of the prior year tax needs to be paid quarterly.  Keep in mind that wage withholding is counted as paid throughout the year, even if the withholding occurs on a year-end bonus.

The third reason to do year-end planning for your tax payments is the timing of state tax payments.  Once you figure out how much will be due and your estimates are up to date, look at the timing of state payments.  State tax is an itemized deduction for taxpayers.  When a taxpayer is paying AMT, that state tax deduction goes away.  So if you are not in AMT, that fourth quarter state estimate should be paid in December so you can deduct it on the current year return.  Conversely if you are in AMT, you should wait until the January 15th due date of fourth quarter estimate payments.

Planning at the end of the year for your tax payments might not save huge dollars, but it’s relatively easy to calculate and it’s a great way to avoid an unpleasant surprise when taxes roll around in April.