Calculating estimates can be tricky so hopefully this information from our Louisville tax firm will help explain it better. Estimates are payments made quarterly throughout the year in order to cover your tax liability. The due dates are as followed:
04/15 – 1st qtr
06/15 – 2nd qtr
09/15 – 3rd qtr
01/15 – 4th qtr
You have to pay 100% of the prior year tax liability or 90% of the current year tax liability to be free from penalty. Payments are made through withholding and estimated payments. If your adjusted gross income (AGI) is $150000 or greater you are required to pay 110% of the prior tax year liability or 90% of the current year tax liability to be free from penalty.
Federal estimate – there is no reason to pay the 4th qtr estimate in the current year instead of the next year since it is not deductible as an itemized deduction and you don’t benefit from paying early.
State estimate – there may be a benefit to paying the 4th qtr by the end of the year because as a cash basis tax payer you can deduct the quarterly estimate in the year you pay it. However if the taxpayers are subject to the alternative minimum tax (AMT) there is no benefit to paying early since the deduction will be added back for AMT tax.
Why do we have to file estimates? This is something asked by many people because either they are not used to paying them or they feel they pay too much already. When you have a tax due on your current return and it exceeds a certain amount estimates may be necessary to avoid additional penalties and interest for not paying enough throughout the year with your income. There will not be a penalty for failure to pay estimated tax for an individual whose tax liability for the year after credit for withheld taxes is less than $1000. Other situations could involve receiving a large amount of capital gains whether through an investment account or through sales of stock. Situations may also change such as no longer being able to claim a child or a change of work leading to more income. No matter the life situation Estimates can be an easy way to avoid additional liabilities come tax filing time.
Paying estimates is the taxpayer’s option but one must realize that there are consequences for not paying your taxes on time and the penalties and interest can really add up the longer you go without paying. While you won’t see these penalties and interest throughout the year once your tax return is filed if you do not pay them then the interest & penalty will be calculated & is due.
Calculating estimates is something that can be tricky but a qualified Louisville CPA can help you handle it with ease.