In This Edition: When Optimists are Too Pessimistic, Tips for People Who Pay or Should Pay Estimated Taxes, and Wrought Advisors Wins Award for College Planning!
In the beginning of the pandemic when cities were locking down, businesses were shutting their doors laying off millions of people, the economy was in a nose dive and so was the stock market. Few people knew whether or not we were in for another 2008 crisis. As it turned out, not even the most optimistic of us understood how quickly the economic situation was to turn around thanks due to quick and unprecedented government intervention and most of us learning how to use Zoom. Five months later, the S&P 500 reached a new all-time high. Incredible.
As events happen and gain momentum, such as in the economic and stock market recovery of late 2020, people are often bad at predicting just how far in one direction or the other those events will go. On the positive side, we often underestimate just how high a stock can rise, or how a portfolio can grow in value over several decades, which is due to our helpful human ability to make projections in linear terms and conversely, our inability to instinctively process compounding growth. When we envision something linearly and it turns out to grow exponentially, our linear estimate will badly undershoot the actual result. Thus, for instance, why most retirees tend to underestimate the dramatic upside results that tend to occur with conservative retirement spending strategies.
For more on this topic, read the post by Nick Maggiulli writing for Dollars and Data.
What's worse than being shocked by the tax owed on your 2021 income tax return due April 18th this year? How about learning that you may have to ALSO pay 2022 income taxes starting the same time? Ouch.
You might need my tax planning service offered through the Wrought Roadmap, my proprietary financial planning process, to avoid that tax surprise, but you may need to pay estimated taxes to the IRS and one or more states during the year if you have income that is not subject to withholding. This can depend on what you do for a living, what your spouse may be earning when you file jointly and the types of income you receive.
My friends at Abo and Company, have put together eleven points to consider regarding your estimated taxes if you need to pay them and how.
1) If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension or other income is not enough. Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return.
2) As a general rule, you must pay federal estimated taxes in 2022 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and 2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2022 taxes or 100 percent of the tax on your 2021 return. If your 2021 Adjusted Gross Income was more than $150,000 ($75,000 if Married Filing Separately) substitute 110% for the 100% requirement. Your 2021 tax return must cover all 12 months.
3) For Sole Proprietors, Partners and S Corporation shareholders, you generally should make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
Read on for more by Abo and Company
Wrought Advisors Awarded Most Comprehensive College Funding Firm in the Northeast!
Planning for the (six figures!) expense that is college is just another part of the Wrought Roadmap, my proprietary financial planning process. There are a lot of good financial planners out there who do great work and despite the competition, I am proud to announce that Wrought Advisors took home the prize for Most Comprehensive College Funding Firm in the Northeast by Wealth and Finance. I want to thank my clients as I am so grateful for our relationship that I never stop learning and improving so I can serve you better.
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