- Category: Individual Taxes
- Written by Madeline Delanni
- Hits: 4525
I read somewhere that some individuals must pay estimated tax each year. However, I received conflicting information from another source. What is correct?
Answer: Let's start by defining estimated tax. It is a prepayment of income tax and/or self-employment tax that you may owe for the current tax year on amounts that are not subject to withholding tax, such as interest income, dividends, alimony, rent and gains from the sale of assets. If you receive a W2 from your employer, they will likely take tax out throughout the year. Thus, you wouldn’t have to pay estimated taxes unless you had other sources of income. In general, you are required to pay estimated tax for the current year if the following applies:
- You expect to owe at least $1,000 federal tax for the current year.
- You expect your withholding from your pension, salary and/or other income subject to withholding tax, along with your credits to be less than the smaller of:
- 90% of the tax to be shown on your current year's tax return.
- 100% of the tax shown on your previous year's tax return, which must be for the full 12 months of that tax year.
If you are required to pay estimated tax, you must remit your payments to the IRS on the following schedule:
|Period for which Payment Is Made||Payment Due Date|
|January 1 through March 31||April 15|
|April 1 through May 31||June 15|
|June 1 through August 31||September 15|
|September 1 through December 31||January 15|
If your tax year is a fiscal year (not January to December), see the instructions for IRS Form 1040-ES.
You should consult with a competent tax professional for assistance with determining the amounts you need to remit each due date. If your payments are less than they should be, you could end up owing the IRS penalties.
Note that you may not need to pay estimated tax for the current year if you meet the following three requirements:
- You were a U.S. citizen for the entire year.
- Your previous tax years spanned 12 months - as opposed to a short year (less than 12 months). A short year could occur if you received income for a period of less than 12 months.
- Your tax liability for the previous year was zero, or you were not required to file an income tax return.
Also, if you receive income from pension and wages, you may be able to avoid estimated tax by having additional amounts withheld from these payments.
There are other factors that may affect your estimated tax, so, again, consult with you tax professional for assistance, and be sure to discuss how your tax-filing status and payments by your spouse (if applicable) would affect your estimated taxes.