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You need to pay your taxes quarterly if.
For most of us, tax day comes just once a year — on or around April 15. But for people who owe estimated taxes, Uncle Sam expects a check four times a year. Unfortunately, you may be one of those beleaguered quarterly taxpayers if any of the following scenarios applies to you.
- You cashed in some significant stock market winners but did not change the tax withholding from your salary.
- You or your spouse are or became self-employed and owe both income and self-employment taxes for your efforts.
- You employ a nanny and pay her federal payroll taxes. You can do this in quarterly payments or in one lump sum when you file your taxes in April. (But you may owe interest if you wait until April.)
- You have income from other sources that you forgot to consider (or had no way of knowing about) when you filled out your W-4 for 2016.
Now that I’ve gotten thousands of you scared, let me tell you the good news: you need not worry about estimated taxes for the 2017 tax year if you are in one of the following two situations.
- Anyone who expects his 2016 tax bill net of salary withholding to be under $1,000.
- Any U.S. citizen or resident whose tax liability for 2015 was zero. You are exempt from any estimated tax payment requirement for 2016.
As for the rest of you, please keep reading. I’ve tried to be brief, but the rules are complex. So anyone wanting more information should download IRS Publication 505 from the IRS website.
Estimated tax payments for the 2017 tax year are due on April 18, June 15, September 15, and January 15 of 2018. All payments should be accompanied by Form 1040-ES, which you can also download from the IRS website. It takes just a few seconds to fill out (honest). If you underpay one or more installments, you get charged interest until the day you catch up. However, the government charges a very reasonable rate: only 4% at the time this was written, subject to change each quarter. Any payments outstanding after April 16 of next year are hit with a 0.5% a month “failure to pay” penalty (equivalent to an annual rate of 6%) plus the aforementioned interest charge.
So how much do I owe?
If you want to completely avoid any interest charges for the 2016 tax year, you must cough up enough via withholding and/or estimated payments to satisfy any one of four “safe-harbor” guidelines. Remember to include any withholding when calculating your payments.
- The first safe harbor is only for folks with 2016 adjusted gross income of $150,000 or less. You will be safe for 2017 if you pay in at least the tax liability number shown on last year’s return (the amount on line 63 of your 206 Form 1040).
- If your 2016 adjusted gross income was over $150,000 (the amount shown on line 37 of your 2016 Form 1040), you are covered for 2017 if you pay in at least 110% of last year’s tax liability via withholding and/or estimated payments.
Regardless of your income level last year, you are cool with the feds if you pay in at least 90% of whatever your 2017 tax bill turns out to be. Obviously, this requires some guesswork on your part. Hence the term “estimated taxes.”
Finally, if this year’s income starts off low and ends up high (say because you have huge fourth-quarter capital gains), you should probably use the “annualized method.” This is an exception to the general rule that your four estimated tax payments should be equal. Under the annualized method, estimated payments correspond to your cash flow, so you won’t owe big installments on the earlier due dates before you have the money to pay them. Unfortunately, the calculations are fairly difficult. (See the instructions to Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts.)
You are free to use whichever of the above safe harbors does the best job of minimizing or deferring your estimated tax payments. However, if you don’t successfully pull into one of the safe harbors, you’ll be charged interest on the payment shortfalls. You can calculate the interest yourself when you file your 2017 return (using Form 2210 and entering the interest due on the appropriate line on page 2 of Form 1040) or let the IRS do the math and bill you.
Example: You figure you’ll owe the government $20,000 for this year (2017), but only $12,000 will be withheld from your salary. Obviously, you’ll be underpaid to the tune of $8,000. But there’s no need to make any estimated payments for this year if your 2016 tax liability was $12,000 or less (assuming 2016 adjusted gross income was $150,000 or less). The first safe harbor listed above gets you off the hook.
But if last year’s tax bill was $15,000, you’ll need to make $3,000 in estimated payments ($750 each) to reserve your safe-harbor berth (counting the estimated tax payments, you will have paid in a total of $15,000 for 2017, which gets you safe under the first safe harbor).
What if I miss a payment?
You won’t be the only one. You have several alternatives to avoid or at least minimize the interest-charge hit.
Say you will be getting a $2,000 refund from your 2016 return. After reading this, you are surprised to find out you owe $3,000 in estimated payments for 2017 ($750 for each quarter). Here’s the easy solution: When you file your 2016 return, tell the IRS you only want $500 back (by entering that amount on line 76a of your 2016 Form 1040). You can use the other $1,500 to cover your April and June estimated payments for this year (enter $1,500 on line 77 of your 2016 Form 1040). Then stay on track by making the last two payments for your 2017 tax year by the Sept. 15, 2017, and Jan. 15, 2018, deadlines.
You can also reduce or eliminate the interest-charge hit from missed estimated tax payments by increasing your salary withholding. Do this by filing a new Form W-4 with your employer. For example, say you owe a total of $3,000 in estimated payments. If you jack up your withholding between now and year’s end by that amount, your estimated tax payment obligation vaporizes.
Finally, you can stop the interest-charge bleeding simply by making oversize estimated payments to compensate for earlier underpayments. Say you missed the $750 payment due on April 18. If you pay in $1,500 on June 15, you’re all caught up. Of course, you’ll be charged two months’ interest on the $750 shortfall, but the interest is only a few bucks.
So you see, even if the estimated-tax rules apply to you, there are easy ways to lessen the pain.
This story has been updated.
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