Am I required to pay estimated taxes?
The general rule is you have to pay estimated tax if
your withholding doesn't cover 90% of your tax liability. But there are
- No estimates are required if the amount due after
subtracting withholding and credits will be less than $1,000.
- In general, no estimates are required if your
withholding and credits add up to at least as much as your prior
year's tax. For 2017, the amount is 110% of the 2016 tax for
people whose 2016 AGI exceeds $150,000. This rule doesn't apply to
farmers and fishermen.
The second exception is particularly important. If
you receive a large amount of investment income in one year — for
example, you sell stock at a large gain or make a rollover to a Roth IRA
— you may not be required to pay estimated tax even though you owe a
great deal of tax that year. You may be able to delay your tax payment
until April 15 because of the exception for the prior year's income.
You won't get this free ride the following year,
though. Now you'll be looking back at a year in which your income was
How do I calculate the estimated payments
You figure the amount you need to pay the
same way you determine whether you need to pay. It's the
difference between the amount of withholding and credits you would need to
have to avoid making payments, as described above, and the amount of
withholding and credits you actually have, with one exception: you don't
get the benefit of the $1,000 rule mentioned above once it's determined
that a payment is required.
The amount you have to pay is usually pretty easy to
determine if you're basing your payments on the prior year's tax
liability. Figuring the payment based on 90% of the current year's tax
liability is more difficult — which is why most people try to avoid that
Am I allowed to make voluntary payments
even if I'm "safe?"
Some people may choose to make estimated tax
payments even when the payments aren't required. We don't recommend this
approach since it deprives you of the opportunity to earn interest on the
amount you prepay, but it does assure that you won't have a crushing tax
bill on April 15.
If I don't want the hassle of estimated
payments, can I simply increase my wage withholdings?
In many cases where you would otherwise be required
to make estimated tax payments, you can avoid that process by increasing
your withholding. Request the appropriate form from your employer and fill
it out in a way that will cause an additional amount to be withheld from
your paycheck. Give us a call and we can assist you with that
How do I make estimated payments to the
If you're unfamiliar with this process, you'll be
pleased to learn how easy it is. You don't have to explain to the IRS how
you arrived at the amount you're paying. The form you fill out is minimal,
basically telling the IRS who you are and what you're paying. The only
parts that are sometimes hard:
- Figuring out how much to pay.
- Coming up with the cash.
- Remembering to send it in on time.
Your payments for 2017 are (were) due April 18, 2017, June 15, 2017, September
15, 2017 and January 15, 2018. Notice that
although they're considered quarterly payments, they're not all three
What happens if I underpay the final tax
amount that I actually end up owing?
Don't panic if you have an underpayment. The penalty
is equivalent to interest on the amount of the underpayment. It's best to
avoid the penalty, but the penalty will be minimal if the underpayment is
small or is corrected within a short period of time.