What are they?
This is really a prepayment of income taxes to the Government (Internal Revenue Service, State or City). Under certain situations where you expect your income to go up, such as self-employment income from a business, sale of investment property, or sale of stocks and bonds to name a few, the government requires you, “the Taxpayer” to prepay your income taxes if it results in more than $1,000 in tax in most cases.
When should you prepay?
Estimated tax payments are required when an individual believes that they will owe tax on their income tax return at the end of the year. Individuals that sell a large piece of property or part of a business would most likely want to make estimated tax payments before the end of the year because of the potential gains on the sale of property. If an individual has large capital gains that are out of the ordinary that individual would want to make estimated payments. Estimated tax payments are made quarterly on the following due dates: April 15, 2013, June 17, 2013, September 16, 2013 and January 16, 2014.
Why should you pay estimated tax payments?
Estimated payments are required by the government if you expect to owe more than $1000 in income taxes for the tax year after subtracting your federal income tax withholding from the total amount of tax you expect to owe for the year. If estimated payments are required for an individual and they are not paid, you will incur a penalty and interest for underpayment.
How much should you prepay?
The safest option to avoid underpayment penalties is to aim for “100% of your previous year’s taxes.” If your adjusted gross income is higher than $150,000 (or $75,000 for those married but filing separate), you will have to pay in 110% of your previous year’s taxes. Payments like these satisfy the “safe-harbor” requirement. If either test is satisfied, you won’t have to pay an estimated tax penalty no matter how much tax you owe with your tax return.
If you have questions about your tax payments, call Vanderbilt CPA Group today. We’re happy to help!