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Estimated Tax Payments...Next One Is Due September 15

by Brett Backues on August 26, 2014
If you asked your CPA to prepare your 2013 income tax return, he may have also prepared 2014 estimated tax payments for you. Have you wondered why?   Have you wondered how these amounts were calculated?  Did you even have a discussion with your CPA about 2014 events that may happen?   Has there been a recent significant event that has affected your 2014 income?
The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn your income during the year.  You pay as you go through income tax withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you may also have to pay estimated taxes.  If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
Generally, you can avoid this penalty if during the year you paid at least 90% of your tax for the current year, or 100% of the tax shown on your return for the prior year, whichever is smaller.  (There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers.)   It is pretty difficult to know what your current year tax is going to be, so most CPA’s use the 100% of prior tax as the benchmark to calculate your estimated tax payments…especially when they don’t discuss with you what your current year is going to bring.
Another common default assumption used by CPA’s to calculate your estimated tax payments is that there will be no change in withholdings.  (Thus assuming you will have the same job with the same income.)  
So, here are the important points on this subject:
    •    If 2014 is turning out to be a down year(your income has reduced significantly compared to 2013), you may be able to reduce the amount of your estimated tax payments (or even not have to pay in any more).  Otherwise you might be getting a big refund next April, but you gave the IRS an interest-free loan!
    •    If 2014 is turning out to be an up year(your income has increased significantly compared to 2013), if you made your estimated tax payments you might be avoiding a penalty for underpayment of estimated tax, but you may still be surprised about the amount of tax due with your tax return for 2014.
    •    It may benefit you to have a discussion with your CPA before he or she calculates estimated tax payments for you, and any time significant events in your life happen that affects your income.
    •    CPA’s are busy and sometimes work only with the information that they have.   Help them help you by sharing with them what is happening with you!