Calculating Estimated Taxes 2008, 2009

[audreyh1]

We are getting a refund for 2008 taxes. I overpaid because my estimated taxes calculations weren't close enough to the actual.

There were two major oversights in my estimated tax spreadsheet:

1. Standard exemptions are no longer phased out to 0. They are phased out to a lower value. The new calculation is explained in IRS Publication 505 (not yet revised for 2009).

2. I was using an old value for the AMT exemption which turns out to have been set much higher in 2008 to $69,950 for joint filers. I guess I didn't catch the increase in 2007 either, but I didn't overpay estimated taxes that year, so I didn't review the numbers.

FYI - In 2009 the AMT exemption was increased to $70,950 American (joint filers)Recovery and Reinvestment Act of 2009. 2009 AMT Tax Brackets - The Finance Buff

Download IRS 1040ES to get the new tax tables and standard exemption and standard deduction numbers for 2009 - www.irs.gov/pub/irs-pdf/f1040es.pdf

Other issues that issue impede my ability to accurately estimate taxes: Most mutual funds do NOT identify qualified dividends until you get your final 1099 forms - well after any estimated taxes are due. So I have to assume the distributions reported are unqualified when I file estimated taxes. I was way off in 2008. Also - foreign tax credit information is not supplied until the 1099s, so I can't use the credit until submit our annual tax return.

Unfortunately, the qualified dividend reporting "problem" is likely to go away in the next year or two as we revert back to the way things used to be.

Anyway - I thought other folks who do estimated taxes might find the information useful.

Audrey

 

[ERD50]

Also recall that the 2008 tax laws were not finalized until ~ Oct of 2008 (including the AMT amount - which has a huge effect on some people). Hard to plan what your taxes might be when Congress has not even shared the rules with you until it is too late anyhow.

One thing seems to hold though - pay 100% of what you owed in 2008 (IIRC, 90% in the lower income brackets, but look it up to be sure) and there will be no penalty.

i guess you could email Geitner and ask what he would do?

-ERD50

 

[audreyh1]

I thought safe harbor was 110% of prior years tax for people in the higher brackets. Did this change? I didn't check that part of the 2009 1040ES instructions. Of course turbotax calculates the simple estimated tax payments for 2009 as part of the 2008 return - I just hadn't reviewed that part yet. I won't be calculating estimated taxes until Apr 2 when I get all the final numbers for this quarter.

Audrey

 

[OAG]

Here is some clarifying information on Estimated Taxes for 2009: Estimated Taxes

 

[Midpack]

We are getting a refund for 2008 taxes. I overpaid because my estimated taxes calculations weren't close enough to the actual. Audrey

We also ended up with a (big) refund for 2008, something I didn't want and hasn't happened for as long as I can remember. So I've printed off some of 1040es using your link and I plan to redo the spreadsheet I use to calculate my estimated taxes. Thanks Audrey.

 

[LOL!]

My understanding is that the safe harbors can be tricky for folks who do not have taxes withheld from a W2 paycheck.

With a W2 paycheck, the taxes withheld are considered to have been paid out evenly throughout the year. This means one can be under withheld all year long and then catch up with the December paychecks or even with a last 1040ES payment in January.

If you pay only through quarterly 1040ES payments, you may not meet a safe harbor for that quarter and owe a penalty. OTOH, since the 1040ES is submitted after you get your income from that quarter, you kinda know what's going on.

But how about this? Why not apply your refund to next year's tax return? And reduce your quarterly tax payment accordingly.

 

[audreyh1]

Safe harbors aren't tricky at all. As long as you pay the prior years taxes (or 110% if you are higher income) in 4 quarterly installments, you will not pay a penalty no matter how much you owe for the current year. That's nice to do after a year where your taxes are low. OAG - I don't see any reference to the 110% in your link, but the 2009 1040ES says 110% of prior years taxes if your income was over $150,000 and that is what my tax program has done.

However, after a year of unusually high taxes you may end up way overpaying with this method, so in this case it is better to calculate your actual income each period and pay the taxes owed so far. If you do this with sufficient margin of safety you shouldn't owe any penalty. In several years of doing this I was only off one quarter because I forgot about some interest income, and the penalty was teeny because I only underpaid for a couple of months. When you do this, you always have to file the 2210 form and fill out the annualized income (AI) schedule.

I expect my taxes may be lower this year than last as I probably won't realize any major capital gains (low stock prices), so I'll be estimating the taxes quarterly. I'll probably go ahead and take my refund which is more than I suspect I owe for Q1 of 2009. We'll see next week!

Another issue - most of my income (as with people who have taxable mostly mutual fund investments distributions) is paid out in the 4th quarter, so it is typical to have low income and taxes reported in Q1, Q2 and Q3, then a huge chunk in Q4. I don't like "paying ahead" on my taxes if I don't have to.

Audrey

 

[ERD50]

I thought safe harbor was 110% of prior years tax for people in the higher brackets.
Audrey

Yes, 100% and 110% (above 75K single or 150K joint) of previous year's tax liability. I was going by memory, the 90% and 100% are for figuring current year's tax due/collected penalties.

Publication 505 (2/2008), Tax Withholding and Estimated Tax

-ERD50

 

[audreyh1]

Yes, the 2009 1040ES instructions have the same rule.

Audrey

P.S. I just love how the 1040ES instructions refer you to Publication 505 for some of the more esoteric calculations such as standard exemption, but they don't update publication 505 until later in the year! At least they haven't updated it for 2009 yet.

Oh well, prior year computations are usually more conservative, good enough for "estimations".

 

[Zathras]

My god, this thread really reinforces the need to simplify our tax system.
Forms and schedules just to get the correct estimate, yuck.
But while they are so complicated, I thank god for tax accountants

 

[Bestwifeever]

Getting a big refund? Think positive--perhaps instead of it being parked with Uncle Sam, that $$ might have been losing value in the markets last year

 

[audreyh1]

Except that I paid my last installment on Jan 15 2009!

Audrey

 

[LOL!]

Safe harbors aren't tricky at all. As long as you pay the prior years taxes (or 110% if you are higher income) in 4 quarterly installments, you will not pay a penalty no matter how much you owe for the current year.

....
Another issue - most of my income (as with people who have taxable mostly mutual fund investments distributions) is paid out in the 4th quarter, so it is typical to have low income and taxes reported in Q1, Q2 and Q3, then a huge chunk in Q4. I don't like "paying ahead" on my taxes if I don't have to.

Audrey

That's the tricky part. Suppose you have all your income in Q1. If you don't pay until Q4 (and have no W2 income to pay taxes with), then you may end up paying a penalty for underpayment of taxes in Q1 even if you have met the safe harbor for the whole year.


I usually purchase tax software around Thanksgiving and do a preliminary run of taxes to get my withholding set up nicely for the December paychecks. I imagine that when I don't have the December paychecks, I will do the same thing to figure out my January quarterly payment.

 

[Koolau]

My god, this thread really reinforces the need to simplify our tax system.
Forms and schedules just to get the correct estimate, yuck.

My fear is that they'll simplify it too much! Like all money goes to gummint FIRST. What they don't need, they send to you in monthly payments! Couldn't be simpler.

 

[samclem]

My god, this thread really reinforces the need to simplify our tax system.
Forms and schedules just to get the correct estimate, yuck.

Righto. And if you guess on the low side about what you are going to earn--lookout for the fees and interest. But, if you are wrong on the high side ad pay too much--no interest, not even a thank you card from Uncle Sam.

I wonder what would happen if we went back to the way things were before 1942: No income tax withholding at all. No estimated tax payments. On March 15th (tax day at that time) you wrote a check for what you owed for the previous year. If people had to write a check every year, there would be a lot more attention to the tax bill we each pay.

 

[audreyh1]

That's the tricky part. Suppose you have all your income in Q1. If you don't pay until Q4 (and have no W2 income to pay taxes with), then you may end up paying a penalty for underpayment of taxes in Q1 even if you have met the safe harbor for the whole year.

Well, the only thing "tricky" about this IMO is that you need to be aware of the tax periods and if you have income during that period you had better know it by the 15th after the period has ended and pay estimated taxes on the income.

It's easy for us because by the 2nd after the end of a month/quarter, we know all the distributions that have been paid out. In fact, Fidelity has a "tax info" page that is updated every time a transaction occurs and the bank reports interest paid YTD.

Audrey

 

[Nords]

Well, the only thing "tricky" about this IMO is that you need to be aware of the tax periods and if you have income during that period you had better know it by the 15th after the period has ended and pay estimated taxes on the income.

We managed to nail ourselves pretty good last year. We rebalanced Feb 2008, with a big cap gains tax bill, and started paying estimated taxes. Then in November we did a humongous tax-loss swap which wiped out those cap gains and more. (It may be years before we book another cap gain.) At that point we'd already handed over large amounts of estimated taxes to the fed & state govts.

Adding insult to injury was TurboTax's decision that there's no way to file electronically. So we mailed $4 of paper to the govt and we'll probably wait another month to get our money back.

Intellectually I completely understand that investing decisions should be made indpendently of the tax consequences. Emotionally, though, when I sell I wince to think of what I'll be doing with Schedule D and other forms...

 

[audreyh1]

Yes, I can see how tax loss swapping late in the year can result in overpaying estimated taxes! I think that happened to me one year.

Audrey

 

[FurBall]

We managed to nail ourselves pretty good last year. We rebalanced Feb 2008, with a big cap gains tax bill, and started paying estimated taxes. Then in November we did a humongous tax-loss swap which wiped out those cap gains and more. (It may be years before we book another cap gain.) At that point we'd already handed over large amounts of estimated taxes to the fed & state govts.

We did the same things to ourselves. We had a huge gain early in the year and paid estimated taxes based on it. Then in November we did tax-loss swaps which wiped it out entirely. To make matters worse, we can't even file until we receive the K-1 that will contain the huge gain.

 

[RunningBum]

Another issue - most of my income (as with people who have taxable mostly mutual fund investments distributions) is paid out in the 4th quarter, so it is typical to have low income and taxes reported in Q1, Q2 and Q3, then a huge chunk in Q4. I don't like "paying ahead" on my taxes if I don't have to.

This is a helpful thread with some good info. But I'm not clear on the above statement. Is the IRS ok with you doing a large estimated tax payment on that big chunk in Q4, after smaller ones in Q1-Q3? It makes sense, but when I stop drawing a paycheck I don't want them coming after me and telling me my estimated payments should have been more even for each quarter.

For now I've been withholding extra from my W-2 by estimating how much I'll have for the year. For a number of reasons I way overshot for 2008, but as someone else said, it wasn't a bad idea for the govt to hold my money for a 0% return last year instead of losing it in the market.

 

[Zathras]

Last year we had a cash sale of our BUD stock causing a large capital gains late in the forth quarter.
The IRS (so far) has had no problem with us making a larger payment in the 4th quarter. According to our accountant, it is not unusual.

 

[audreyh1]

This is a helpful thread with some good info. But I'm not clear on the above statement. Is the IRS ok with you doing a large estimated tax payment on that big chunk in Q4, after smaller ones in Q1-Q3? It makes sense, but when I stop drawing a paycheck I don't want them coming after me and telling me my estimated payments should have been more even for each quarter.

YES. You don't have to pay taxes on income until you earn it. [In my case there is really no way to predict ahead of time what income I will have in any given "quarter" tax period.] You use the Annualized Income (AI) method for estimating your taxes. Then when you file your final return on Apr 15 of the following year, you must include the Form 2210 AI schedule to show how much income was earned in each quarter and the corresponding estimated tax paid. As long as you paid what you owed for each quarter according to the annualized income method, you are fine. No penalty.

The annualized income method is pretty funky. It uses a multiplier for each tax period (Jan-Mar, Apr-May, June-Aug, Sep-Dec) to "annualize" the income - i.e. guesstimate what your income would be for the year based on the income so far - and then you pay a prorated YTD percentage based on that annualized income.

The above probably sounds VERY confusing, but the 1040ES explains the AI method.

To be successful at using the AI method you need to be good at being able to find out what your income was each tax period and using a spreadsheet! When I first started this 10 years ago, neither Turbotax nor Quicken was able to compute this method for me so I had to figure out how to it myself. There might be software available now, I don't know.

Audrey

 

[ESRBob]

Envious of all you who've already filed and maybe even gotten a refund. I'm still waiting for one last &#@% K-1 from a limited partnership I'm in. I got into a bunch of exchange-listed pipeline master limited partnerships last year (I know, another dumb move, but I couldn't resist 10% dividends) and they've only got their K-1s to me a week or so ago.

 

[Nords]

Envious of all you who've already filed and maybe even gotten a refund. I'm still waiting for one last &#@% K-1 from a limited partnership I'm in. I got into a bunch of exchange-listed pipeline master limited partnerships last year (I know, another dumb move, but I couldn't resist 10% dividends) and they've only got their K-1s to me a week or so ago.

I share your pain... I made a private-equity investment after reading about it in a popular ER asset-allocation book, and now I'm enjoying last-minute K-1 entries too!

 

[audreyh1]

Arrrgh! A new twist in my estimated tax calculations. I realized > $3000 in capital losses during the first quarter (selling bond funds to buy stocks in my January rebalance) and now I need to make sure I accurately compute my annualized income.

For those who aren't aware - You can only take $3000 in capital losses against ordinary income. The excess is then carried forward to the next year.

I expect this "problem" to resolve itself later in the year when I get more capital gains distributions.

Back to the drawing board on my spreadsheets.....

Audrey