Taxpayer asks:
Tax Girl: Nice blog, I came across your site researching my situation. Last year I got back a refund (because my investments tanked and I had a capital loss) so this year I did not send in any estimated tax payments. I meet with my financial advisor yesterday he said my portfolio is up, really up :-), I will have taxable capital gains and interest income and I should mail money to the fed and the state. How do I get a voucher? What address do I mail it to? I missed the 9-15 date, is there a penalty? Should I mail the money right away or before the 1-15-10 date? I am sorry but the IRS site and my state site give me a headache to look at. 🙁
Any other sagacious information you can give me is very welcomed.
Taxgirl says:
I’m going to totally confess that I had to look up sagacious – but now, I’ll take it!
If your advisors have determined that you need to file estimated payments, you’ll need to use a federal form 1040-ES. You can get a copy of the federal form 1040-ES by calling the IRS (1-800-829-3676), visiting their web site or downloading it here (as a pdf). The mailing address for the form and payment varies depending on where you live – you can find the addresses on the form. There’s also a worksheet so that you can figure out how much to pay.
An excellent resource for state forms can be found at the FTA State Tax Forms Page.
It’s important to try to file by the applicable deadlines but if you miss one, don’t assume all is lost and just ignore it. Just file as soon as you can. Penalties are imposed on each underpayment for the number of days it remains unpaid – so it’s to your advantage to file as soon as you can.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
Estimated taxes are driving me crazy. I never have any idea how much I will make in a quarter, so my plan was to see how each quarter goes and then file online (I set up an account) and pay the approximate taxes each quarter. I hope this is ok, because I had no idea how to estimate for an entire year and then divide it up into the quarters for payment. If I make more money in a quarter than the previous quarter, and pay more estimated taxes, will I end up having a penalty?
Don’t forget for most people if you pay in what your tax liability was last year you will not have a penalty if you owe. And if you figure your tax in January or early February you still have until April 15 to pay the tax.
Remember however if have no withholding (totally self employed) the most important estimated payment you make is the first one. Waiting until September to make you first estimate is never a good idea unless you can show yon made no money until the third quarter. You are suppose to pay the tax as you make it.
If you have withholding but have other income you don’t have to make estimated payments you can simply increase your withholding.
To the person who wrote in, my portfolio is up too, but I won’t have to pay tax on those gains until I sell the stock. However, if you have mutual funds those capital gains will hit you this year as you get to pay the gains realized by the mutual fund. So it makes a difference as to what you are invested in, I hope your finacial advisor understands that, many do not.
In order to protect yourself against underpayment penalties, the rule is that you must pay in quarterly:
-90% of your current year (2009) tax (which requires you to estimate) , or:
-100% (110% if your AGI is over $150k/$75k MFS) of the prior year (2009) tax. This must be paid in quarterly.
My advice would be to go ahead and pay in whatever amount is necessary to get you to the 100%/110% of your 2008 tax since you’ve stated that your 2009 income (and therefore tax) will be much higher than 2008. The sooner you pay in, the lower your penalty will be.
Karyn, your easies solution would be to take 100%/110% of your prior year tax, divide by four, and just pay that in each quarter. The only reason I would try to estimate 2009 income is if you expect it to be much lower than 2008. However, what you’re currently doing will work for the IRS as Form 2210 provides the ability to enter your income by quarters.
As I do with all clients, if you’re withholding or lack thereof requires you to make estimated payments each year, I’d advise you to apply any overpayment to your next year tax and forego receiving a refund.
I guess the issue is that I often don’t get paid until the end of the year (working for publishers, etc.) and it is never the same as the previous year. How can I pay an estimated tax if I haven’t made any money yet! I did make an estimated tax payment in July and September.
I’m paranoid about penalties though, so we’ve been having extra money withheld from my husband’s paychecks, in addition to paying “pie in the sky” tax estimations for what we “hope” to make this year, but probably won’t.
We also, for the first time ever, will have the opportunity to use a Schedule A/B because we bought a house, so that will affect our taxes too (I hope!).
All in all, it feels like a crap shoot and even though we are trying our best, we could get a penalty in the end. Which would be especially ironic if we end up getting a refund.
Great graphics – cute banner. Nice blog……
Karyn, if you bought a house in 2009 you may be able to claim the first time home buyer credit for 2009.
Also if you are mostly paid in December you should be able to figure your tax and pay the right amount before January 15 2010, using the annualized method on form 2210 you should not have to worry about any penalties.
Thanks, Rick, for the info on the annualized method and Form 2210.
Actually, thanks to the information from Taxgirl on this blog, we elected to file an amended return and claimed the first time home buyer credit and received the money this spring.
Since the caller (writer?) stated that he got a refund last year, isn’t it possible that he/she is exempt because of the safe harbor provisions that Rick and Natalie B. mentioned? His/her W-2 withholding this year might very well match last year’s tax.
Ralph, I agree with you (and many others). However, it’s clear that she has an advisor who has seen her tax info (and I have not), so I wouldn’t want to suggest that the advice wasn’t appropriate since I don’t know for sure. That’s why I just focused on the forms issue.