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Estimated Tax Payment Requirements

April 4, 2017

Those that have income not subject to withholding taxes or that have more than one job where the withholding is inadequate might need to pay estimated taxes four times a year.

Income not subject to withholding includes self-employment, partnership, S corporation or trust income, interest, dividends, capital gains, option writing, rent income, prizes, awards, gambling or lottery winnings, pensions, certain legal settlements and alimony.

Taxes need to be paid to the IRS and any state you are taxed in. Also, to be included is self-employment tax. The general rule is that estimated taxes must be paid if the balance due after subtracting all withholdings will be greater than $1,000 and also greater than 90% of this year’s tax. However, there is an exemption from paying estimated tax if your withholdings are greater than last year’s tax (or greater than 110% of last year’s tax if your AGI last year was over $150,000 for a joint taxpayer), or if this is the first year you are filing a tax return.

25% of the estimated taxes for 2017 are due this year on each of April 18, June 15, September 15 and January 16, 2018. Underpayments will cause a penalty of 4 percent annualized on a daily basis for the amount that should have been paid. Not a terribly onerous amount. For those that have trouble budgeting the payments, you can make more frequent payments and even weekly or monthly payments if you want – just make sure you pay the required amount prior to each of the four due dates.

You can avoid paying estimated taxes if withholdings are sufficient. You can ask your employer to increase your withholding or have greater amounts withheld from retirement plan distributions.

Another way is to take an IRA distribution even if you are not required to, and request that the funds be applied fully to withholding tax; and then, to avoid having this treated as a taxable distribution, repay from other funds the full amount to the IRA within 60 days designating that the distribution should be treated as a tax-free rollover. If you do this make sure you do not run afoul of the once in every 12-month period tax free IRA rollover rules.

You are still required to pay estimated tax even if your income is earned erratically or mostly at the end of the year. In that situation, you can pay the proper estimated tax on actual income received through the month before the estimated tax payment due date. This requires separate calculations before making each payment. You will also have to record these calculations on Form 2210 when you file your taxes. By keeping careful records and calculating the correct estimated tax payment due with each installment a penalty can be avoided.

People that will have an extension should consider including the first estimated payment along with the extension payment. When you finally file, any overpayment will be considered as an estimated payment and credited to 2017 as the first installment. If you underpaid your extension payment the added estimated tax amount will provide a cushion so interest and penalties for an underpayment of the extension will be avoided or minimized. Those penalty and interest amounts are greater than the penalty for not paying the right estimated tax amounts.

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