The U.S. tax collection system is based on a pay-as-you-go policy. This is why employees have income tax withheld and paid to the IRS throughout the year by their employer. But if you have income from other sources that either doesn’t withhold any income tax or not enough tax, you may need to make estimated payments during the year. Types of taxable income include:
- Self-employment income
- Income from S Corporations and/or Partnerships
- Interest and/or dividends
- Capital gains
- Pension and/or IRA distributions
- Rental net income
In general you will need to pay estimated taxes in 2012 if, after subtracting withholding tax and any refundable credits on next year’s 1040 return, you still owe the IRS at least $1,000. The IRS assumes you earn income evenly throughout the year, so they expect estimates to be made in four equal installments (remember that pay-as-you-go policy). The 2012 estimated tax payment due dates to avoid penalties are:
- April 17, 2012 (already happened)
- June 15, 2012 (coming up soon)
- September 17, 2012
- January 15, 2013
A taxpayer can also make a payment with a request to file an extension. (Please note you still must have all taxes paid by the original due date, even with an extension.) But the underestimated tax penalty will be charged in the form of interest for the number of days that any parts of expected quarterly payments are considered late. The penalty can be calculated on Form 2210, Underpayment of Estimated Tax, when you file and pay your 1040 tax liability. If you don’t include Form 2210, the IRS will calculate the penalty themselves and bill you.
We need to mention that like everything else concerning the IRS, there are exceptions where the IRS will sometimes waive underpayment penalties. But if you need to make estimated tax payments, all we can say is: pay them, and make the payments as accurate as possible.
You can try to figure your expected tax for next year on a worksheet provided by the IRS. You’ll need to take into consideration any changes in your situation and be aware of any new tax laws, in addition to estimating your expected total gross income, deductions and credits. A trusted tax advisor is your best resource when it comes to tax planning and estimating payments.
