Estimated tax payment rules

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	Estimated tax payment rules Personal Finance Advisor by Deloitte & Touche OnLine May 10, 1999

Sometimes you need to pay taxes ahead of time. Here are some guidelines.

Individuals are required to pay tax throughout the year as income is earned. The tax can be paid through withholdings or quarterly estimated payments. As a general rule, quarterly estimated tax payments are not required if the individual taxpayer (1) expects to owe less than $1,000 tax after considering withholdings or (2) had no tax liability in the prior year (12-month period).

Required Payments: If the appropriate amount of estimated tax (withholdings and quarterly estimated payments) is not paid during the year, the IRS may assess a penalty. For 1999, an underpayment penalty will not be assessed if estimated payments and withholdings equal at least:

The 1998 total tax liability, provided the taxpayer’s 1998 adjusted gross income (AGI) is $150,000 or less. For individuals with AGI greater than $150,000, estimated tax payments and withholdings must equal 105 percent of the 1998 tax liability (106 percent for 2000 and 2001, 112 percent for 2002, and 110 percent for 2003).
Ninety percent of the 1999 tax liability.
Ninety percent of the 1999 tax liability based on annualization of actual year-to-date income for each quarter of 1999. This method is useful when an individual taxpayer’s earnings fluctuate during the course of the year (for example, cyclical business income, unexpected large capital gain).

Quarterly Estimated Tax Payments
Based on	Date and Percent Due
Based on	April 15	June 15	Sept. 15	Jan. 15
Prior-year tax (100%)	25.0%	50.0%	75.0%	100%
Prior-year tax (105%)	26.25	52.5	78.75	105
Current-year tax (90%)	22.5	45	67.5	90
Annualized current-year tax (90%)	22.5*	45.0*	67.5	90
*Includes annualized taxable income from Jan. 1 through…	March 31	May 31	Aug. 31	Dec. 31

Income tax that is withheld will be treated as being paid equally throughout the year, unless the taxpayer establishes the dates on which the amounts are withheld. This rule does not apply to quarterly estimated tax payments. If in a subsequent quarter, a taxpayer determines that previous estimated tax payments were not sufficient, an underpayment penalty may be avoided if he/she adjusts withholdings for the remainder of the year (that is, files an amended Form W-4, Employee’s Withholding Allowance Certificate, with his/her employer).

If estimated taxes are overpaid, the taxpayer has made an interest-free loan to the government. The goal is to pay the minimum amount necessary to avoid underpayment penalties. In most cases, the easiest alternative is to base estimated tax payments on the prior-year tax liability.

Underpayment Penalty: The IRS computes the underpayment penalty for each quarterly installment date; therefore, a penalty could be assessed even though the taxpayer made up the underpayment in the subsequent quarter. The penalty is a nondeductible interest charge on the underpayment amount, computed using the Federal short-term interest rate plus three percentage points. The penalty interest rate is determined during the first month of each calendar quarter and becomes effective for the following quarter -- the current rate is eight percent. The penalty is assessed from the installment due date until the earlier of (1) the date the tax is paid (for example, an additional payment during the quarter or a larger payment in the subsequent quarter) or (2) the regular due date for filing the tax return (for example, April 15, 2000).

Waiver of Penalty: The IRS can waive the underpayment penalty in certain circumstances:

Estimated tax payments were not made because of a casualty loss, natural disaster, or other similar situation that would make imposition of a penalty inequitable.
Estimated payments were not made in the year the taxpayer retired (after age 62) or became disabled, provided there is "reasonable cause" and "no willful neglect"

Taxpayers may request a penalty waiver by filing Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, and submitting the appropriate documentation.

Other Issues: Taxpayers must consider all sources of earned income when computing estimated tax payments, including earned income from pass-through entities (for example, S corporations, partnerships, trusts). Employment taxes due for house-hold employees and self-employment taxes must be included in withholdings or estimated tax payments. Additionally, most states have estimated tax payment requirements and penalties that are similar to the Federal rules.

These are some thoughts to consider about 1999 estimated tax payments. Your Deloitte & Touche financial advisor also can provide information and should be consulted before any action is taken.