If you are required to make estimated tax payments to the IRS and fail to do by the deadline, you will owe the IRS penalties. To ensure you are not subject to these penalties, check to determine whether you are required to make such payments. The following is a high level explanation of the rules that apply.
Who Owes Estimated Taxes
Generally, you are required to pay estimated federal income tax if:
- You expect to owe at least $1,000 in income tax for the year; and
- The amount you will have withheld from income during the year, plus any refundable tax credits is expected to be less that the smaller of the following:
- 90% of the tax to be shown on your 2012 tax return, or
- 100% of the tax shown on your 2011 tax return, which must cover all twelve months
If you are a farmer or fisherman, the 90% is reduced to just over 66%. Additionally, the 100% is increased to 110% if your adjusted gross income (AGI) for 2011 was more than $150,000 ($75,000 if your filing status for 2012 is married-filing-separately).
How to Pay Your Estimated Taxes
The IRS provides the following options for paying estimated taxes:
• If you are due a tax refund, you can apply the amount to your estimated taxes
• Completing the payment voucher included in Form 1040-ES and mail it to the IRS along with a check or money order,
• Making your payment electronically using the Electronic Federal Tax Payment System,
• Having the amount debited from your account by using the electronic fund withdrawal method, or
• Using your credit or debit card or a pay-by-phone system over the Internet.
You can also have the amount withheld from your wages by completing IRS Form W-4P and indicate the additional amount you want to have withheld; and/or from unemployment compensation and certain federal government payments including social security income by completing IRS Form W-4V.
When to Pay Your Estimated Taxes
You may pay your estimated taxes by April 17, 2012. You can aslo make quarterly payments in equal amounts on April 17, June 15, September 17 and Jan. 15, 2013. Payments made through the mail will meet this deadline if postmarked by the due date. If you miss the deadlines, you will owe the IRS penalties for underpayment, which can be computed by completing IRS Form 2210.
If You Miss the Deadlines
If you miss the deadlines for making your estimated tax payments, you can ask the IRS to waive the penalty if you retired after reaching age 62 or became disabled, and your underpayment was due to reasonable cause, a federally declared disaster, casualty or unusual circumstances. IRS Form 2210 (Form 2210-F for fishermen and farmers) must be filed when requesting the waiver.
Getting Around the Quarterly Payment Schedule
If you miss the due dates for making quarterly payments and you do not qualify for a waiver, you can avoid the penalty by making a lump-sum payment as withholding from a distribution from your IRA or other retirement account. Under this method, you would complete IRS Form W-4P and have the amount remitted directly to the IRS by the payor. Amounts paid though this method automatically meets the quarterly payment requirement, even if the payment is made at the end of the year.
When using this method, consider that the amount could be taxable, and may be subject to the 10% early distribution penalty if you are under the age of 59.5 when the distribution is made from your account. This income tax and penalty will not apply if you rollover the amount within 60 days of the distribution being made from your account, assuming that the amount is eligible for rollover.
The Bottom Line
Contrary to popular belief, you could still owe penalties if you fail to meet your estimated payment obligations, even if you are due a tax refund. Consult with your tax professional to determine if you need to make payments, and if so, how much.