Here’s an important tax planning strategy that can save you thousands in penalties if you’ve missed estimated tax payments for 2025.
The Penalty Problem
When you don’t make your 2025 estimated tax payments on time, the IRS charges a non-deductible 7 percent penalty that compounds daily.
Because penalties are not deductible, they are considerably more costly than deductible interest.
Simply writing a check today won’t erase the penalties. It only prevents them from growing further. But there is a powerful way to make them disappear entirely.
The One Perfect Solution
By using a retirement account with 60-day rollover provisions, you can eliminate estimated tax penalties instantly. Here’s how:
- Withdraw funds from your IRA, 401(k), or other eligible plan, and direct the custodian to withhold federal income tax.
- Repay the full amount into the retirement account within 60 days using other funds.
The IRS treats the withheld taxes as if they were made evenly across all four estimated tax deadlines. And because you repaid the account within 60 days, the withdrawal is not taxable, and no penalty applies.
Other Options and Pitfalls
If you are age 73 or over, you can use withholding taxes from required minimum distributions (RMDs) to cover both your RMD and your estimated tax needs.
Don’t use a W-2 bonus. It triggers payroll taxes and can reduce your Section 199A deduction—likely more costly (and perhaps far more costly) than the penalty itself.
Green Krist, CPA specializes in assisting taxpayers with IRS and North Carolina Department of Revenue issues in the greater Raleigh, North Carolina area.
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