| Estimated Quarterly Taxes: Tips and Information |
(c) 2002, 2004 By Frank Jersey
Any individual who is self-employed, retired,
laid-off, or disabled, knows they are responsible for filing and
paying Federal estimated quarterly taxes and in states having
a state income tax, for filing and paying State
estimated quarterly taxes. This can be very different from the
taxation that takes place while you are employed.
First of all, the term 'estimated quarterly taxes' isn't
exactly accurate. The Internal Revenue Service (IRS) publishes
a schedule that jumps around a little. The first payment
for a tax year is due April 15, the second payment is due
June 15, the third payment is due October 15 and the last
payment is due January 15 of the next year. So the payment
schedule is more like 31/2 months, 2 months, 4 months and 3 months
in making up the Federal estimated quarterly tax
payments. The intent, however, is each payment represents one
quarter of what you will owe for the year.
It takes discipline to plan and set aside funds for
tax payments throughout the year especially when the
individual or married couple are managing their own income. If
sufficient funds are not set aside as income is
earned, then the individual or married couple will be put in a
situation where some assets might have to be liquidated in order
to come up with enough money to pay the taxes. An easier
method is for the individual or married couple to know what
their approximate Federal and State tax rates are and to
apply those rates to income as it is earned. The calculated
taxes should be set-aside in a separate interest bearing
account until it is time to pay the estimated tax payments.
The IRS allows for two basic methods of calculating
estimated taxes. An individual or married couple (if
filing jointly) can either elect to pay an amount based on
the total taxes paid in the previous year or pay at least
ninety percent of the estimated taxes that will be due in the
current year. Remember, in either situation, the
amounts paid are only for estimated taxes and the actual tax
due will probably differ from the total of estimated taxes
actually paid. If electing to pay based on the prior
year, the IRS allows you to calculate your amount and to
then spread that amount into four equal payments, paying
them on the estimated tax due dates. Example: A married couple
filed a joint return Last Year's total income with an income
of $160,000. The IRS formula is 100% of the prior year
income if the income is less than $150,000 or 110% if greater
than $150,000. If the couple paid Federal taxes of $42,000
last year on income of $160,000, this year's estimated
taxes would be $42,000 X 1.10 = $46,200. The estimated
quarterly tax payments would be $11,550 due on each estimated
tax installment date.
If the individual elects to pay at least ninety
percent of the estimated tax due during the current year, then
the individual or married couple must keep track of income
received during the year and make sure the total
estimated taxes paid by the time the last installment is paid
equals ninety percent of the actual tax that will be due at
filing time. (This should be easy to do, even if the first
three installments were insufficient, as the last
installment date is January of the next calendar year. This allows you
to adjust the last payment for any unexpected income.)
Failure to pay at least ninety percent of the tax due will
result in a penalty being assessed on the amounts failing to
meet the ninety percent level. Keep in mind; the ninety percent
option is just that, ninety percent of the actual tax
that will be due by the April 15th filing date. If you just
meet the ninety percent, then the remaining ten percent due
will have to be paid with the final filing.
One surprise people discover when electing the ninety
percent option is that at the time the first payment
is due in the next year coincides with the annual filing from
the last year. Thus, not only is the estimated quarterly
payment due for the current year, but any remaining balance
owed from the prior year such as the ten percent not paid
due to electing the ninety percent rule will be due with the
year end filing for the prior year. If funds were not set
aside, coming up with the monies to pay these taxes can be
challenging. Keep in mind; these rules apply to both
Federal and State taxes if your state has an income tax. In
most states, the estimated taxes piggyback on the federal
tax calculations.
********************************************************
Mr. Jersey has worked in the financial services
industry for over 30 years. Visit his website at
http://www.someonesgottadoit.com for more information about
Retirement Issues and Opportunities.
|
Back to Articles Index
|
|
 |
|
