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Monday May 23, 2022

Washington News

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Prepare For Filing - Last Estimated Payment

During the first month of 2022, it is an excellent time to think about preparing to file your 2021 income tax return. In IR-2022-3 the Internal Revenue Service (IRS) reminded taxpayers that they may wish to make a fourth quarterly tax payment prior to the deadline of Tuesday, January 18, 2022.

A quarterly tax payment can reduce or eliminate a potential tax penalty if you have underpaid your income tax. Income taxes are pay-as-you-go. This means that taxpayers must withhold the tax payments from paychecks, pension payments, Social Security and other government transfers. Most withholding is accomplished through these methods.

However, some self-employed individuals or investors also make quarterly estimated tax payments. The combination of your withholding and quarterly tax payments will offset your required tax when you file your return.

If you have investments or other substantial income, it is important to make your tax payments. Your fourth tax payment in January may reduce or even eliminate any potential tax penalty.

You might consider an estimated payment if you itemized deductions in the past, have changed to the standard deduction this year, have two wage-earners in your household or have other investment sources of income. Your estimated payment should consider your taxable income, any unemployment compensation and other financial transactions.

1. Taxable Income — Your wages, interest and investment income are all generally taxable. You also may have income from virtual currency, a state tax refund or the gig economy.

2. Unemployment Compensation — All 2021 unemployment compensation is fully taxable. The American Rescue Plan Act of 2021 only allowed an unemployment compensation exclusion of $10,200 for year 2020. However, if you received unemployment compensation in 2021 your taxes may be substantially higher than the prior year.

3. Financial Transactions — You may have received a year-end or holiday bonus, stock dividends, capital gain distributions from mutual funds, virtual currency payments or other types of income from sales of assets.

Your taxable income, unemployment compensation and income from financial transactions is added together to calculate your adjusted gross income (AGI). The Tax Withholding Estimator on www.irs.gov may be helpful to you in determining whether you need to make an estimated tax payment before January 18, 2022.

You can easily make a tax payment with the IRS Direct Pay system on www.irs.gov. If you have an IRS Online Account, you also may use that method to make your payment.

Published January 7, 2022

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