The year in its final quarter (and when did that happen?), but you still have a couple of months to adjust your financial picture for 2014. Right now is actually an excellent time to get your tax planning in order, so that you can keep yourself out of trouble with the Internal Revenue Service when you file next April.
The ideal situation would be for you to finish each year having paid exactly what you owe in taxes via timely estimated payments or withholding. By avoiding a huge refund, you keep your money in your control instead of giving Uncle Sam an interest-free loan. By not having to write a huge check in April, you protect yourself both from having to come up with the money to write that check, and from potential underpayment penalties.
Tax Planning for People Without a Crystal Ball
Of course, the odds are pretty good that you won't really know your total financial picture for 2014 down to the penny until the year is completely over. In fact, if you use some financial tools, such as a Traditional IRA, you can reduce your taxable income for 2014 by several thousand dollars, even after the calendar turns to 2015.
%VIRTUAL-WSSCourseInline-771%Fortunately, the IRS realizes that it's nearly impossible to get your taxes squared away perfectly in advance. You do have until April 15, 2015, to get it right for 2014, and as long as you get your tax picture close enough with the time you've got left in 2014, the IRS won't penalize you, even if you do ultimately owe it money.
The IRS uses a series of "safe harbor" tests to help determine if the taxes you pay throughout the year are close enough to what you ultimately owe to protect you from getting penalized for underpaying. As long as you meet any of the tests for the year through timely estimated payments or withholdings, you won't owe a penalty when you file and pay your 2014 taxes by April 15, 2015. The key tests:
If you owe less than $1,000.
If you've paid at least 90 percent of your taxes for 2014 (or 66 2/3 percent if you're a farmer or fisherman).
If you've paid at least as much for 2014 as 100 percent of your taxes for 2013 (110 percent if your 2013 adjusted gross income was $150,000 or higher -- $75,000 if your 2014 filing status is married filing separately)
As long as you have enough withheld by Dec. 31, 2014, to meet any of those safe harbor tests, you'll be fine. If you're not on track to be covered based on your current withholding, you can adjust your withholding:
From your paycheck: Use Form W-4 or your employer's substitute.
From your pension, annuity or IRA: Use Form W-4P or your plan's substitute.
From your unemployment check or Social Security: Use Form W-4V or your payer's substitute.
As an alternative to withholding, you can use estimated tax payments to assure you meet a safe harbor test. Using estimated tax payments generally works much better, though, if you follow that process throughout the entire year rather than getting started in October. IRS Form 1040ES has the forms you'll need to submit with your payment as well as instructions on how to set up an estimated tax payment plan.
Pay What You Owe -- and Not a Penny More
While it may seem complicated, getting your taxes in order now can help you be in a better spot when you file your final return for the year. By setting yourself up to be covered by a safe harbor test, you won't owe penalties on top of your taxes, and by not giving Uncle Sam too large an interest-free loan, you can make better use of your own money now.
You can strike that balance much more easily now than if you try to get it done with your last check of the year. While you may not know your total income until after the year comes to a close, you likely know enough by this point to get yourself covered by at least one safe harbor. So get going, and set yourself up to make your tax filing in April 2015 as painless as possible.
Chuck Saletta is a Motley Fool contributor. Try any of our Foolish newsletter services free for 30 days.Motley Fool retirement experts have created a free report on a simple strategy totake advantage of a little-known IRS rule to boost your retirement income.