When are estimated tax payments necesary?

[WanderALot]

We just efiled our taxes this weekend and TurboTax says that we need to pay estimated taxes. We paid estimated taxes for 2005 (about 4k) and got a refund of about $900. 2005 was the first year that we had to make estimated tax payments so I'm a little confused about this. Why do I need to make estimated tax payments if I got a refund? Is it because my overpayment of taxes was only $900 even after making estimated payments of $4k?

According to the IRS website:

Who Must Pay Estimated Tax

If you had a tax liability for 2005, you may have to pay estimated tax for 2006.

General Rule
You must pay estimated tax for 2006 if both of the following apply.

1.
You expect to owe at least $1000 in tax for 2006 after subtracting your withholding and credits.
2.
You expect your withholding and credits to be less than the smaller of;
*
90% of the tax to be shown on your 2006 tax return, or
*
100% of the tax shown on your 2005 tax return. Your 2005 tax return must cover all 12 months.

I intend to increase my withholding in order to get closer to my actual tax bill. So that should mean that I shouldn't need to make estimated tax payments for 2006 right?

Thanks.

 

[eridanus]

Do you have both a W2 job and a 1099 job?

Short answer:

You were short $3100 (4000 - 900). You need to make that up in quarterly taxes. The first is due today ($3100/4 is one method).


Edit: The advise in this post is worth what you pay for it. I'm not a CPA or tax lawyer. Blahblahblah.

 

[d]

Is it because my overpayment of taxes was only $900 even after making estimated payments of $4k?

Yes. look at it this way: your 05 net estimated payment was the 4k minus the refund, about $3,100. IF 06 were in all respects like 05, you would, then, need to make total payments of $3,100 (some of which could be made with the 06 April filing).

 

[audreyh1]

I intend to increase my withholding in order to get closer to my actual tax bill.  So that should mean that I shouldn't need to make estimated tax payments for 2006 right?

Yes, if you can be sure that your additional withholding will cover 90% of your actual 2006 taxes owed, you should be OK.

There is also a safe harbor: if you pay by withholding at least the same amount as 2005, you are covered. Exception: if your 2005 adjusted gross income was >$150,000 then you must withold 110% of the 2005 tax amount to be safe.
http://www.smartmoney.com/tax/filing/index.cfm?story=estimated

(Also not a tax preparer, CPA, etc., etc.,)

Audrey

 

[WanderALot]

Thanks for the replies! All disclaimers have been duly noted!

Yes. look at it this way: your 05 net estimated payment was the 4k minus the refund, about $3,100. IF 06 were in all respects like 05, you would, then, need to make total payments of $3,100 (some of which could be made with the 06 April filing).

Ok, that makes sense.

Yes, if you can be sure that your additional withholding will cover 90% of your actual 2006 taxes owed, you should be OK.

So it sounds like if I increase my withholding to cover at least 90% of my tax liability than making the estimated tax payments are not required. Is there a publication besides IRS 505 that I should be looking at? IRS 505 also says that I should pay either 90% of my 2006 tax liability or 100% of my 2005 taxes, whichever's greater.

Do you have both a W2 job and a 1099 job?

Both DW and I only get W2s.

What's interesting is that TurboTax didn't say anything about California estimated taxes being required, even though we owed about $1800 to the state. It just said that we "should" make estimated tax payments.

 

[audreyh1]

I should pay either 90% of my 2006 tax liability or 100% of my 2005 taxes, whichever's greater.

I think if you withhold 100% of your 2005 taxes you are safe even if it is less than 90% of your 2006 tax liability. That's why it is called a "safe harbor".

Someone can correct me if I am wrong.

Audrey

 

[lazygood4nothinbum]

i was stunned by something similar this year. i had a $56 penalty for not prepaying 2005 taxes (quit working july 2005). i had no idea how this works. i figured i'd just pay taxes when i thought taxes were due. i hadn't considered that maybe my employer was paying my taxes throughout the year and so now i guess i have to do that too. live & learn.

 

[audreyh1]

i was stunned by something similar this year. i had a $56 penalty for not prepaying 2005 taxes (quit working july 2005). i had no idea how this works. i figured i'd just pay taxes when i thought taxes were due. i hadn't considered that maybe my employer was paying my taxes throughout the year and so now i guess i have to do that too. live & learn.

Yeah - taxes are due quarterly not annually.  Kind of a culture shock if your employer was taking care of all of this for you.  You are not alone. I know lots of people who experienced the same rude awakening.

Audrey

 

[d]

I think if you withhold 100% of your 2005 taxes you are safe even if it is less than 90% of your 2006 tax liability.  That's why it is called a "safe harbor".

Someone can correct me if I am wrong.

Audrey

That's my read as well (providing adjusted gross < = 150k)

 

[free4now]

I never pay estimated tax even though turbotax tells me to pay estimated tax almost every year. Sometimes I end up in the safe harbors, and once I ended up paying a fairly trivial penalty (less than $100 IIRC).

I look at the penalty as a reasonable cost for avoiding all the hassle of trying to calculate estimated taxes.

 

[audreyh1]

I never pay estimated tax even though turbotax tells me to pay estimated tax almost every year.   Sometimes I end up in the safe harbors, and once I ended up paying a fairly trivial penalty (less than $100 IIRC).

I look at the penalty as a reasonable cost for avoiding all the hassle of trying to calculate estimated taxes.   

Is that because you have tax withheld for you?

Turbotax will calculate quarterly estimated taxes for you based on the prior year's taxes - even print out little vouchers. That way it's a "no brainer".

Audrey

 

[free4now]

Is that because you have tax withheld for you?

Yep, this is while I was working.   I suppose now that I'll be sans W2 I'll have to reconsider my approach.

Turbotax will calculate quarterly estimated taxes for you based on the prior year's taxes - even print out little vouchers.  That way it's a "no brainer".

In my case the amounts that turbotax calculated were always wildly inaccurate, simply because the next year would not be like the last.    Most times I underwitheld taxes it was due to some combination of stock trading, option sales, and miscellaneous deductions.   That stuff changes year by year.  There is a way that you can refine the estimate by entering most of the info you would enter on your next year's tax return, but that seemed like too much hassle to me to gather estimates.

 

[audreyh1]

In my case the amounts that turbotax calculated were always wildly inaccurate, simply because the next year would not be like the last.    Most times I underwitheld taxes it was due to some combination of stock trading, option sales, and miscellaneous deductions.   That stuff changes year by year.  There is a way that you can refine the estimate by entering most of the info you would enter on your next year's tax return, but that seemed like too much hassle to me to gather estimates.

Yes, now that you are sans W2, you do have to pay estimated taxes.

Don't worry about estimating this year's taxes, just divide 2005 taxes by 4 and pay that each quarter (if 2005 adjusted gross income was < $150,000).

Yes, you might actually owe a lot more on April 15th of the 2006, or you might get a refund, but you won't pay a penalty!

That is the "no-brainer" approach. And Turbotax will calculate it for you and give you the dates due if you like.

Audrey