After 36 years of public accounting experience and an equal number of tax seasons, I believe the Quarterly Estimated Tax Payment system/process is one of the most misunderstood elements in our tax system and in the preparation of individual taxes.
- The 2013 estimated tax payment vouchers that were prepared when your 2012 individual tax return was prepared have not been filed with the IRS. The IRS does not know how much you should pay quarterly. They are not expecting you to pay quarterly. If you don’t pay you will not receive a collection notice. However, if you don’t pay timely and in a sufficient amount, your next return will most likely include a penalty for underpayment of estimated tax.
- Even though the sum of the four 2013 quarterly vouchers may be similar to the amount due with your 2012 tax return, this is not a payment program to satisfy the 2012 tax. If you pay the 2013 quarterly amounts, but send no payment with the 2012 tax return you will get a notice billing you for the tax plus a failure to pay penalty and interest.
- Your CPA generally does not have knowledge of quarterly tax payments you pay or don’t pay. Unless you tell him/her. Be sure to communicate information about the dates and amounts paid in the “tax organizer” provided by your CPA.
- Calculation of the 2013 quarterly payment amounts is generally focused on your “required annual payment” to avoid an underpayment penalty. That amount is the lesser of 90 percent of the current year tax or 100 percent (110 percent if your AGI is $150,000 or more) of the tax shown on the prior year return. A tax of $1,000 or less after considering withholding is not subject to penalty. Therefore, if your 2012 AGI was $140,000, your total tax was $20,000, and you had tax withheld from wages of $12,000, your 2013 quarterly estimate payments would calculate at $8,000, or $2,000 per quarter.
- That reminds me of another often misunderstood feature of this payment system. The payment due dates are April 15th, June 15th, September 15th, and January 15th. That sounds simple enough. The misunderstood one is the January 15th payment. Many taxpayers gather their 2012 tax information by summarizing their check book or bank statements for the calendar year and mistakenly include the January 15,2012 payment in the information instead of the January 15, 2013 payment. Still others assume the January 15, 2013 payment is the first toward 2013 taxes when, in fact, it is the final 2012 payment.
- True or False, the estimated vouchers must always be paid in the amount as prepared? False. These should not be viewed as billings from the IRS or the Oregon Department of Revenue. If your income, deduction, or tax credit circumstances change during the year contact your CPA to determine if a different tax payment amount is appropriate. You can still utilize the original voucher; just change the amount to correspond to the amount of your check.
- The reason you have to pay quarterly estimates is because you owed tax last year of because you are considered a high income taxpayer. No, the reason taxpayers make tax payments using Form 1040-ES on a quarterly basis is due to the nature of their income. A retired person who collects social security benefits, receives interest and dividends from investments, and receives a retirement distribution is more likely to pay taxes using Form 1040-ES than a wage earner who has taxes withheld from their wages. If your income is derived significantly from sources that don’t have tax directly withheld you will likely pay using Form 1040-ES.
To conclude this article I will remind you that the 2013 estimated tax payment due dates are as follows:
- April 15, 2013
- June 17, 2013
- September 16, 2013
- January 15, 2014
If you have any questions about paying the taxes quarterly versus having them withheld from your sources of income contact your CPA to discuss and decide.