John Bullis: Do the math on estimated tax matters
April 3, 2012
The question about whether Estimated Tax should be paid is all based on trying to avoid the small penalty for Underpayment of Estimated Tax (Form 2210 of Form1040).
The penalty is usually figured on a quarterly basis. The penalty is usually small, less than 3 percent of the tax due.
No penalty is owed if the amount to pay is less than $1,000.
No penalty is owed if the prior year’s tax is less than the amount of income tax withheld from wages, retirement pay, annuities, IRA distributions, Social Security benefits or other sources (if the current year withholding is more than the prior year tax).
An illustration is if the prior year tax was $2,000 and the current year withholding is $2,000 or more, no penalty applies.
On the other hand, if deposits were made by paying estimated tax instead of income tax withholding, there might be a small penalty since that is figured on a quarterly basis.
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Withholding tax is treated as if it was withheld 1/12 each month, even if it all was withheld in December. So, the “quarterly” penalty computation does not apply so often if the deposits were by tax withheld.
Some clients have been pleasantly surprised how small the penalty is. The cost of “using the government’s money” is usually less than the costs to borrow and pay all the estimated tax deposits timely.
The schedule of estimated tax payments is called “quarterly” but it really isn’t every three months. The first payment is due April 15 (or so) and the second payment is due only two months later, on June 15 (or so). This year, it’s April 17 instead of April 15.
The third payment is due Sept. 15, and that is three months after June 15.
The fourth payment is due Jan.15 of the next year – but that is four months after the Sept. 15 payment. So much for “quarterly” according the to the tax law.
A lot of folks find it is easier to have income tax withheld instead of making estimated tax payments. They don’t have to remember the payment dates, do checks, mail timely, etc. They don’t miss the tax withheld much. They just live on the net checks, the amount they receive after the tax has been withheld. They have simplified their lives.
Did you hear, “Nonsense is good only because common sense is so limited?”
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.