What are estimated taxes?
If you receive income from any source other than wages you may be required to pay an estimated tax to both the federal and state governments on that income. Our tax system is a "Pay as you go" system. When you receive income, you must also pay the federal and state government an estimated amount of tax on that income. Wages are controlled through withholding, since it is the dominant source of income for U.S. taxpayers.
When do penalties occur?
Penalties can occur: 1.) If you owe $1,000 or more in federal taxes and it is more than 10% of the total tax liability for the year. 2.) If you expect to pay in less taxes than what your last year's tax liability was, or if your adjusted gross income in the past tax year was $150,000 or more (jointly), then 110% of what your last year's liability was.
Planning helps avoid penalties!
When and how do you pay?
One fourth of the taxes must be paid for the current tax year on form 1040-ES no later than:
April 15th, for the first 1/4th
June15th, for the second 1/4th
September 15th, for the 3rd 1/4th
January 15th of the subsequent year
How are they calculated?
We recommend that you have your tax preparer annualize your current year income and deductions using a tax planning software with the current tax tables and deductions that will accurately project the year end taxes you will owe to both the federal and state government. You don't want to overpay your taxes and on the other hand you don't want to miss the mark and after all the trouble of going through the calculation still come up short.
How much is the penalty ?
Penalty for underpayment is calculated on the amount which does not meet the test for the $1,000 underpayment and 90% of the total current year liability, 100% of the prior year's AGI or if prior year AGI was $150,000 or more, 110% of the prior year's AGI. It is 5% of the underpayment amount over the number of days from when it was due until it was paid. Each 1/4th payment is assessed separately.
Can a penalty be waived?
Penalties can be waived 1.) If you did not make a payment because of a casualty, or other unusual circumstance 2.) If you became retired (age 62) or became disabled. 3.) You had a reasonable cause, not due to willful neglect.
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Robert Reinert Consulting
https://www.rreinert.net/
Prepared by: Robert Reinert, CPA
