2011 - Do You Need to Make Estimated Tax Payments?
The tax return original filing date has now come and gone, and some may have found themselves in the position, perhaps for the first time, of owing taxes with their returns due to the receipt of income upon which there was no income tax withheld (gas lease income, for example). If that's you, and you expect the situation to continue in the future, you may need to make estimated tax payments.
While there aren't any changes in the estimated tax rules themselves for 2011, there are a number of new, changed and expiring provisions that will affect some individuals' estimated tax computations for 2011. Here is a brief overview of the estimated tax rules for individuals, and a look at the changes that may impact 2011 estimated taxes.
Who Needs to Pay Estimated Tax
Individuals who have income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.) must pay estimated tax or possibly face a penalty.
In addition, taxpayers who do not elect voluntary withholding on certain types of income, such as unemployment compensation and the taxable part of social security payments, also may have to pay estimated tax on those items or face a penalty.
The penalty is, in effect, an interest charge on the amount that should have been paid, and is charged from the due date of the payment until either the payment is made or until the due date of the tax return, whichever comes first.
When and How Much to Pay
For 2011 estimated tax, in general, a taxpayer must pay 25% of a "required annual payment" by April 18, 2011, June 15, 2011, September 15, 2011 and January 17, 2012 to avoid an underpayment penalty.
The required annual payment for most taxpayers is the lower of (1) 90% of the tax shown on the 2011 return or (2) 100% of the tax shown on the 2010 return, even if filed late (this is known as the "prior year exception").
However, a taxpayer (other than a farmer or fisherman) whose adjusted gross income on his 2010 return is over $150,000 (over $75,000 if married filing separately) must pay the lower of 90% of his 2011 tax or 110% of his 2010 tax.
Also, the prior year exception does not apply for a taxpayer who did not file a 2010 return or filed a 2010 return that did not cover 12 months.
Other Exceptions to Penalty
There is no underpayment penalty if the tax shown on the return (after withholding) is less than $1,000. Also, estimated tax does not have to be paid for
2011 if the taxpayer was a U.S. citizen or resident alien for all of 2010 and had no tax liability for the full 12-month 2010 tax year.
Annualized Method May Help
A taxpayer who, after March 31, 2011, has a large change in income, deductions, additional taxes, or credits that requires him to start making estimated tax payments can use the annualized income installment method to potentially lower or eliminate the underpayment penalty.
While the due dates will not change, the payment amounts will vary based on the taxpayer's income, deductions, additional taxes, and credits for the months ending before each payment due date.
As a result, this method may allow the taxpayer to skip or lower the amount due for one or more payments.
A taxpayer who uses the annualized method should be sure to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his 2011 tax return to indicate to IRS how he has computed his payments, even if no penalty is owed.
Farmers and Fishermen.
Special estimated tax rules that are beyond the scope of this article apply to farmers and fishermen. Consult a professional tax advisor for further information if you think this may apply to you.
Finally, you may have noticed above that the 1st required payment due date has already passed. What to do? Answer; make the required payment as soon as possible. The underpayment penalty will only be calculated through the date the payment is made, so the sooner the better.
