US Treasury Building, photo by Bentley Smith.
So you’ve done your taxes and now you’ve got a huge balance due. You have two problems—one is figuring out how to pay now, and the other is how to not owe next year. Today we’re looking at how not to owe next year. I recently did a post about changing your withholding, today I’m looking at making estimated tax payments.
If you’re self employed or have a lot of investment income, you might need to make quarterly estimated tax payments so that you don’t get hit with a huge tax debt and underpayment penalties. Generally, if you expect to owe over $1,000 in income taxes when you file your return, you should be filing estimated tax payments. (Note: if you can make up the difference by withholding the tax from your paycheck, you can do it that way.)
Estimated tax payments are paid four times a year: April 15 (the 18th this year), June 15th, September 15th, and January 15th of next year. Note that the dates seem a little funky, that’s why I listed them.
You make estimated tax payments with form 1040ES. Here’s a link to the forms on the IRS website: http://www.irs.gov/pub/irs-pdf/f1040es.pdf.
Some people find that their income is pretty stable and it’s easy to figure what the estimated tax payment should be. Just figure how much you’re going to owe and divide by four. Nice and easy. Unfortunately, it’s not always that easy for everyone. Maybe you own a business and your income is very sporadic, or you had a situation where you sold some stocks and made an uncharacteristically high capital gain. If you have a situation where your income is higher than normal, you can always adjust your estimated tax payment to cover the situation. If you feel the need to make an extra payment, you can just use a blank 1040ES from. (Seriously, do you think the IRS would say “no” to you making an extra estimated tax payment?)
Most people who owe federal estimated tax payments also need to make state estimated payments as well. Here’s a link to the IRS page with the state links: http://www.irs.gov/businesses/small/article/0,,id=99021,00.html
Here’s a little tax tip about your state estimated tax payments: your fourth annual payment isn’t due until January 15th, but if you pay on or before December 31st, you may include that state tax payment as a deduction on the Schedule A of your federal return. If you have to pay Alternative Minimum Tax (AMT) then it won’t help you, but if you don’t pay AMT you might like having that extra deduction.