Unless you’re making your living with a rod and reel or sowing corn seeds on fertile fields, then you must be mindful of paying your estimated tax within the IRS allotted percentages and deadlines. Fishermen and farmers still have to make estimated tax payments, although they do get a few leniencies that are not available to most of us. So if you are not in one of these lines of work, then you’re going to have to pay 25% of a “required annual payment” by April 15. Individuals will have to follow this up with an additional 25% on June 15, September 15 and a final 25% by January 15, to avoid an underpayment penalty.
Most individuals will be required to pay the lower of either 90% of the tax shown on the current year’s return or 100% of the tax from the previous year. Higher income level individuals need to be a bit more generous when the payment dates roll around. If your previous year’s return shows a gross income that is greater than $150,000 (over $75,000 married filing separately) you must pay the lower of, 90% of the current year’s return or 110% of the tax paid in the previous year.
Most individuals who draw their income from wages will satisfy these payment requirements through the tax withheld by their employer from their paycheck. If all your income will be subject to income tax withholding, you probably do not need to pay estimated tax.
If you fail to make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by IRS on deficiencies, times the amount of the underpayment for the period of the underpayment. The following is taken from the IRS Website on estimated taxes.
Who Must Pay Estimated Tax
If you owed additional tax for 2013, you may have to pay estimated tax for 2014.
You can use the following general rule as a guide during the year to see if you will have enough withholding, or should increase your withholding or make estimated tax payments.
General Rule
In most cases, you must pay estimated tax for 2014 if both of the following apply.
- You expect to owe at least $1,000 in tax for 2014, after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your 2014 tax return, or
- 100% of the tax shown on your 2013 tax return. Your 2013 tax return must cover all 12 months.
Remember If all your income will be subject to income tax withholding, you probably do not need to pay estimated tax.
Example 1.
Jane Smart uses Figure 2-A and the following information to figure whether she should pay estimated tax for 2014. She files as head of household claiming her dependent son, takes the standard deduction, and expects no refundable credits for 2014.
| Expected adjusted gross income (AGI) for 2014 |
$82,800 |
| AGI for 2013 |
$73,700 |
| Total tax on 2013 return (Form 1040, line 61) |
$ 8,746 |
| Total 2014 estimated tax (line 13c of the 2014 Estimated Tax Worksheet) |
$11,015 |
| Tax expected to be withheld in 2014 |
$10,000 |
Jane’s answer to Figure 2-A, box 1, is YES; she expects to owe at least $1,000 for 2014 after subtracting her withholding from her expected total tax ($11,015 − $10,000 = $1,015). Her answer to box 2a is YES; she expects her income tax withholding ($10,000) to be at least 90% of the tax to be shown on her 2014 return ($11,015 × 90% = $9,913.50). Jane does not need to pay estimated tax.
Example 2.
The facts are the same as in Example 1, except that Jane expects only $8,700 tax to be withheld in 2014. Because that is less than $9,913.50, her answer tobox 2a is NO.
Jane’s answer tobox2bis also NO; she does not expect her income tax withholding ($8,700) to be at least 100% of the total tax shown on her 2013 return ($8,746). Jane must increase her withholding or pay estimated tax for 2014.
Example 3.
The facts are the same as in Example 2, except that the total tax shown on Jane’s 2013 return was $8,600. Because she expects to have more than $8,600 withheld in 2014 ($8,700), her answer tobox 2b is YES. Jane does not need to pay estimated tax for 2014.
Married Taxpayers
If you qualify to make joint estimated tax payments, apply the rules discussed here to your joint estimated income.
You and your spouse can make joint estimated tax payments even if you are not living together.
However, you and your spouse cannot make joint estimated tax payments if:
- You are legally separated under a decree of divorce or separate maintenance,
- You and your spouse have different tax years,
- Either spouse is a nonresident alien (unless that spouse elected to be treated as a resident alien for tax purposes). See Choosing Resident Alien Status in Publication 519, or
- Individuals of the same sex and opposite sex who are in registered domestic partnerships, civil unions, or other similar formal relationships that are not marriages under state law cannot make joint estimated tax payments. These individuals can take credit only for the estimated tax payments that he or she made.
If you and your spouse cannot make joint estimated tax payments, apply these rules to your separate estimated income.
Making joint or separate estimated tax payments will not affect your choice of filing a joint tax return or separate returns for 2014.
All in all the Estimated Minimum tax Liability from your income may sound overwhelming, but garvey & garvey, llc CPAs can easily assist investors in establishing a method that is appropriate for them so that there are no unwelcome surprises when the tax year ends.