Gidney & Company, P.A.,CPA's

Individual Estimated Tax Payment and Planning Letter.

Re: Individual Estimated Tax Payments

Dear Client:

Last tax year was a good year for a lot of our clients bringing them higher income, though with it came the bad news of higher taxes.  Now, in 2016, some individuals have to pay quarterly estimated taxes or face additional payments in the form of interest and/or penalties on the amount of underpaid taxes.  Self-employed persons, retirees and nonworking individuals most often must pay quarterly estimated tax to avoid the penalty.  Still, an employee may need to pay quarterly estimated taxes if the amount of tax withheld from wages is not sufficient to cover the tax on other income.  The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay.  That is because while the IRS will refund the overpayment when you file your return, it will not pay you interest on it.  Individual estimated tax payments are generally made in four installments.  For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15 and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or holiday).

Generally, you must pay estimated taxes in 2016 if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect that your withholding and credits to be less than the smaller of 90 percent of your 2016 taxes or 100 percent of the tax on your 2015 return.  Please note, there are special rules for higher income individuals.

Usually, there is no penalty if your estimated tax payments plus other tax payments, such as wage withholding, equal either 100 percent of your prior year's tax liability or 90 percent of your current year's tax liability.  However, if your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty.  For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax.  In determining your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of social security taxes for the self-employed.

Suppose you owe only a relatively small amount of tax?  There is no penalty if the tax underpayment for the year is less than $1,000.  However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if you realize you have miscalculated before the year ends? An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall.  The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end.  The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can you do?  If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax.  Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year.  Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment.  Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.

Remember that you are responsible for paying your estimated taxes timely.  An extension of time to file your tax return, in April does not extend the due date of paying your taxes timely.  The IRS will and can assess multiple penalties greater than 25 percent of taxes due plus interest.

As you can see from this overview, figuring out estimated taxes can be rather complex.  We are prepared to assist you in modeling scenarios and developing projections to help determine which strategies are right for you.  Please do not hesitate to call me at (305) 866-6266 to schedule an appointment to begin discussing your options.

Sincerly yours,

Gidney & Company 

Still have questions? Please contact us anytime! We look forward to hearing from you.