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Estimated Quarterly Taxes: Tips and Information

Any individual who is self-employed, retired, laid-off, or disabled, knows they are responsible for filing and paying Federal estimated quarterly taxes and in states having a state income tax, for filing and paying State estimated quarterly taxes. This can be very different from the taxation that takes place while you are employed. First of all, the term 'estimated quarterly taxes' isn't exactly accurate. The Internal Revenue Service (IRS) publishes a schedule that jumps around a little. The first payment for a tax year is due April 15, the second payment is due June 15, the third payment is due October 15 and the last payment is due January 15 of the next year. So the payment schedule is more like 31/2 months, 2 months, 4 months and 3 months in making up the Federal estimated quarterly tax payments. The intent, however, is each payment represents one quarter of what you will owe for the year.

It takes discipline to plan and set aside funds for tax payments throughout the year especially when the individual or married couple are managing their own income. If sufficient funds are not set aside as income is earned, then the individual or married couple will be put in a situation where some assets might have to be liquidated in order to come up with enough money to pay the taxes. An easier method is for the individual or married couple to know what their approximate Federal and State tax rates are and to apply those rates to income as it is earned. The calculated taxes should be set-aside in a separate interest bearing account until it is time to pay the estimated tax payments.

The IRS allows for two basic methods of calculating estimated taxes. An individual or married couple (if filing jointly) can either elect to pay an amount based on the total taxes paid in the previous year or pay at least ninety percent of the estimated taxes that will be due in the

current year. Remember, in either situation, the amounts paid are only for estimated taxes and the actual tax due will probably differ from the total of estimated taxes

actually paid. If electing to pay based on the prior year, the IRS allows you to calculate your amount and to then spread that amount into four equal payments, paying them on the estimated tax due dates. Example: A married couple filed a joint return Last Year's total income with an income of $160,000. The IRS formula is 100% of the prior year income if the income is less than $150,000 or 110% if greater than $150,000. If the couple paid Federal taxes of $42,000 last year on income of $160,000, this year's estimated taxes would be $42,000 X 1.10 = $46,200. The estimated quarterly tax payments would be $11,550 due on each estimated tax installment date.

If the individual elects to pay at least ninety percent of the estimated tax due during the current year, then the individual or married couple must keep track of income received during the year and make sure the total estimated taxes paid by the time the last installment is paid equals ninety percent of the actual tax that will be due at filing time.

(This should be easy to do, even if the first three installments were insufficient, as the last installment date is January of the next calendar year. This allows you to adjust the last payment for any unexpected income.)

Failure to pay at least ninety percent of the tax due will result in a penalty being assessed on the amounts failing to meet the ninety percent level. Keep in mind; the ninety percent option is just that, ninety percent of the actual tax that will be due by the April 15th filing date. If you just meet the ninety percent, then the remaining ten percent due will have to be paid with the final filing.

One surprise people discover when electing the ninety percent option is that at the time the first payment is due in the next year coincides with the annual filing from the last year. Thus, not only is the estimated quarterly payment due for the current year, but any remaining balance owed from the prior year such as the ten percent not paid due to electing the ninety percent rule will be due with the year end filing for the prior year. If funds were not set aside, coming up with the monies to pay these taxes can be challenging. Keep in mind; these rules apply to both Federal and State taxes if your state has an income tax. In most states, the estimated taxes piggyback on the federal tax calculations.

(c) 2002, 2004 By Frank Jersey

Mr. Jersey has worked in the financial services industry for over 30 years. Visit his website at for more information about Retirement Issues and Opportunities.

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