Most individuals cover their tax bill for the year by having taxes withheld from their paychecks. But many others, including self-employed business owners and those living on investment income, must pay via estimated taxes. Waiting until you file a return for 2018 to pay the full bill can result in penalties and interest, so it's better not to ignore estimated taxes.
Individuals pay estimated taxes four times a year: April 15, June 15, September 15 and January 15 of the following year. When the due date falls on a weekend or legal holiday, the due date becomes the next business day. This year, the first installment of estimated taxes for 2019 is due on April 15, 2019. This date applies to Maine and Massachusetts residents even though they have an April 17 deadline for filing their 2018 federal income tax return.
If you get a filing extension for your 2018 personal income tax return, keep in mind that you don't get more time to pay your estimated taxes for 2019. The other installments of estimated taxes for 2019 are due on June 17 and September 16, 2019, and on January 15, 2020.
Even though you may pay the first installment of estimated taxes for 2019 on the same day as you file your 2018 tax return, the actions are separate. Don’t include your estimated taxes with your tax return.
Calculating What to Pay
If you project that your tax bill for 2019 will be under $1,000, after taking into account any withholding and refundable tax credits (e.g., earned income credit; premium tax credit), you need not bother with estimated taxes. But if you expect to pay $1,000 or more, you should either:
- Pay estimated taxes to avoid or at least minimize any penalties, or
- Increase withholding to cover what you have projected for taxes above your current withholding and refundable credits. If you are employed, increase withholding by filing a new Form W-4 with your employer. If you receive pension or annuity income, file Form W-4P with the plan administrator or other party paying your benefits. You can opt for voluntary withholding on such payments as Social Security benefits and unemployment benefits by filing Form W-4V.
It can be difficult to know at the start of 2019 what your income will be for the full year and what you’ll owe in total. That said, you can rely on two safe harbors to figure your estimated tax payments. Using either of them means that you may owe taxes in the end, but you won’t be subject to any penalties.
- Current year safe harbor. If the taxes you pay for the year through withholding and estimated taxes turn out to be at least 90% of your final bill for 2019 and you made all of your required estimated payments on time, no penalties will apply.
- Prior year safe harbor. If you peg your payments for 2019 to your 2018 tax bill, you are also assured of being penalty free. The taxes you pay (estimated and withheld) for 2019 must be at least 100% of your 2018 bill. However, if your adjusted gross income for 2018 was more than $150,000 ($75,000 for those who are married filing separately), the 2019 payments must be at least 110% of the 2018 bill. (Different rules apply to farmers and fishermen.)
If your income changes dramatically during the year, you can adjust the remaining estimated tax payments accordingly. If your income drops because you stop working, for example, you can reduce the rest of your estimated tax payments for 2019 so you don’t overpay and have to wait until you file your return in order to receive a refund.
What’s New for 2019
Relying on a safe harbor protects you from penalties. But paying what you expect to owe means you won’t have to come up with a big payment next April. The best action is to project your 2019 bill as precisely as possible by starting with your 2018 tax situation and then making adjustments for 2019. Take into account:
- Changes in circumstances for this year. Will you be getting married or divorced (impacting your filing status and the tax rates that apply to that status)? Will you have a child (the child tax credit)? Will you buy a home (added deductions for mortgage interest and real estate taxes)?
- New tax rules. With 2018, the full sweep of the Tax Cuts and Jobs Act took effect; these rules continue into 2019 – through 2025, in fact. The standard deduction basically doubled, the personal exemption disappeared, harsh limits reduced the possible deductions for state and local taxes and for mortgage interest. Personal income tax brackets changed significantly, giving large numbers of taxpayers at both ends of the spectrum a significant tax cut and raising taxes for some in the upper middle/lower upper income ranges. A host of miscellaneous deductions disappeared, including the moving-for-your-job deduction (except for active duty military) and deductions for unreimbursed work expenses for employees.
- Inflation adjustments. In addition, dozens of tax breaks are adjusted annually for inflation, such as the IRS standard mileage rates. These may mean you owe less tax, even if your income is the same in 2018 as it was in 2017 For example, the standard deduction amounts, exemptions for you and dependents and earned income credit amounts are all slightly higher in 2016. Use the 2019 tax rates released by the IRS, which you should find in the instructions to Form 1040-ES to figure your estimated taxes for the year.
The Bottom Line
Figuring estimated taxes isn’t an exact science, but getting close means you’ll avoid penalties and ensure that you don’t have to make a big (and perhaps unaffordable) lump-sum payment when you file your return. Watch for deadlines and, where necessary, work with a CPA or other tax professional.