November 5, 2012

Avoiding Estimated Payment Penalties

By : Schanel & Associates

At this time of the year, it is also prudent for you to check your income-tax withholding payments. Failure to satisfy the withholding rules can result in a tax penalty when you file your return. If you receive significant income from sources other than your job, or if you are self-employed, you may be required to make quarterly estimated tax payments directly to the government.

Your total payments in tax withholding from your paycheck and estimated tax payments you send to the IRS over the course of the year should typically be at least 90% of your 2012 federal tax liability. Or, you can base your payments on the taxes you paid for 2011.

 - If your adjusted gross income (AGI) in 2011 was $150,000 or less ($75,000 AGI or less for married persons filing separate returns), this alternative requires a 2012 payment of 100% of your 2011 tax liability.

 - If your 2011 AGI was over $150,000 ($75,000), this alternative requires a payment for 2012 of 110% of your 2011 tax.

If you fail to meet these payment rules, the IRS may charge you a penalty, unless the final tax payment owed on your tax return is less than $1,000.

Example: Assume you will incur 2012 federal income taxes of $50,000. For 2011, assume your taxes were $40,000. To avoid a penalty, you must pay 2012 withholding and/or estimated taxes of: (1) 90% of your 2012 tax (or $45,000); or (2) if your AGI in 2011 was $150,000 or less ($75,000 or less if you were a married-separate filer), 100% of 2011’s tax (or $40,000); or (3) if your 2011 AGI was more than $150,000 ($75,000 as a married-separate filer), 110% of your 2011 tax (or $44,000).

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The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.