You don’t need to have taken a single tax law course to save money on your individual income taxes and build your financial history. All you need to do is repay your student loans, pay quarterly estimated taxes, and timely file your income tax returns. Soon you’ll be hanging up your own “Attorney at Law” shingle.
Qualifying young lawyers may benefit from the student loan interest deduction, if you’re repaying interest on your law school loans. 26 U.S.C.A. § 221(a). The maximum “above the line” deduction you may receive is $2,500. § 221(b)(1). Young lawyers who work at small-to-midsize law firms, judicial clerks, and public interest workers benefit the most from this deduction, as the maximum $2,500 deduction begins to phase out as your modified adjusted gross income (MAGI)—income before any student loan interest deduction—for the year surpasses $60,000. § 221(b)(2). Most “big law” associates will not receive any tax savings on student loan interest because the student loan interest deduction is completely phased out once your MAGI exceeds $75,000.
Nevertheless, young “big law” associates have other concerns: avoiding the underpayment of estimated tax payment penalty. Generally, taxpayers must pay quarterly estimated taxes or face penalties. § 6654(c). However, the withholding taxes withdrawn from a salaried employees’ paycheck, if withheld, generally avoids the underpayment of estimated tax penalties. § 6654(a). Because of their high salaries, “big law” associates should engage in careful tax planning to determine how much withholding and estimated tax payments are necessary to satisfy the statutory percent tests, which can be as high as 110 percent. Don’t fret though because you may fit within an exception (see § 6654(e)(1), (2)), apply for a waiver (see § 6654(e)(3)), or annualize your income to reduce or remove any underpayment of estimated tax penalties and interest. See § 6654(d)(2).
Finally, filing income tax returns and paying taxes timely will undoubtedly save you tax dollars. Generally, individual tax returns must be filed on, and any tax due must be paid by, April 15, unless you file for an extension of time to file your tax return until October 15. §6081(a). A penalty of 5 percent of the tax due will be assessed for every month you fail to file, up to 25 percent. §6651(a)(1). Many people assume that by filing for an extension of time, they also receive an extension of time to pay their tax liability. However, the extension is in respect to filing only. A late payment penalty of .5 percent of the tax liability due will be assessed for every month you fail to pay your tax liability after April 15, not to exceed 25 percent. §6651(a)(2). Furthermore, you may be liable for interest on the amount of tax you underpaid. See §6601(a).
The fortune of hanging up your own “Attorney at Law” shingle and saving money on your income taxes is in your own hands. To build your financial history, file accurate income tax returns. Do so by tax planning, ensuring timely filing of your returns, paying your tax liability by April 15, and avoiding underpayment of estimated tax penalties and interest.