As the clock winds down on 2013, taxpayers should carefully examine their tax withholding/estimated tax payment situations. This year may be an especially critical year in this regard, because for the first time a new tax kicks into many taxpayers’ pictures: the 3.8% Medicare surtax applicable to net investment income.
If you’re having an especially good year, say, in the market, and/or if the new surtaxes may apply to you – check the level of your Federal income tax withholding, in comparison to the amount of payments required to keep you out of underpayment penalty trouble. Recall that the use of estimated tax payments doesn’t provide the same flexibility as withholding. An individual who has underpaid an estimated tax installment generally cannot avoid the penalty by increasing one or more estimates for later periods. But income tax withheld by an employer is treated under the law as paid in equal amounts on each of the four installment dates – even in situations in which a large amount of “extra” tax is withheld late in the year.