Tax Time & Estimated Taxes

[jedi]

Well it's that time of year again when we all start thing of taxes. & at the same time. Got a question for those that are more tax savey.
I typically get a ~$1K refund for my federal taxes. Last year, however, around SEP/OCT I ended up changing my withhodings (work salary for a company) from 10 to 21 and thus got no taxes (FED wise) taken away for the remainder of the year. Using the W-2 calculator on the IRS website I figured (back in SEP) that I was about even with the IRS in terms of taxes. Did the calculation again and it turns out I'll be owe about $10.

So at the start of this year I figured. Well shoot I should just keep my withholdings at 21 and the "extra" that typiclaly goes to taxes I'll just leave in a savings account all year long thus I collect the interest myself and come tax time next year (2013) I can use that money and pay the taxes I'll owe for sure. Since it looks that I tend to owe about $3500 each year. So I'll make some money on the inetrest instead of giving uncle sam an interest free loan.

Well then today I read this article:
What You Need to Know for Your 2011 Tax Filing and What
and begin to wonder about this "estimate tax payments" since I've did not know anything about that other than its when people pay their taxes "ahead of time". So I go here for more info:

Estimated Taxes

and that just gave me a headache.
A quick summary and this is where I need help is as follows:

- Estimated taxes (ETs) are for people who are going to owe more than $1K
- ETs are paid to uncle sam 4 times a year via this website
https://www.eftps.gov/eftps/
- You use Form 1040-ES to figure out your estimated taxes & divided by that 4 and then on those 4 times per year you pay just that part.
- So long as you keep it under $1K the difference of what you owe Uncle Sam you are OK (penealty wise).

My inital idea was that next April 2013 I would end up paying all the taxes I owed for 2012 (~$3500) and thus allow me to sit on my money (in savings) for 16 months. However if I'm reading the estimate tax stuff correclty I can't do this without getting a pentalty since I would owe over $1000. So instead I need to do the 4 installments and pay about $875 say $900 every 4 months to ensure that when I do the taxes in 2013 I don't owe Uncle Sam more than $1,000.

So am I reading & understanding that correctly?


-Jedi

 

[skydelta34]

Based upon the information you gave, you have it figured out about right.

 

[jedi]

Oh you just had to go and do it...........I was having a perfectly fine morning and...............

Why so glum? You have to do your "patriotic" duty and pay your fair share.

-Jedi

 

[PAMom]

If you have no withholdings, definitely file estimated payments. The IRS takes a dim view of you hanging on to 'their' money. If you meet all of last year's tax liability or 90% for the present year no penalty is assessed.

If you get into the penalty area, the penalty is figured on every quarter that you are short and then the interest is figured daily for each quarter.
I don't see how you could come out ahead as their interest rates are much higher than you could earn. Don't remember what they are right now.

I had a problem with this last year. I had income in the last quarter that I paid one estimated payment on at the end of the year. Because of the amount the IRS figured I had received it all year and penalized me for non payment for the entire year, even though I had no tax due (in fact an $80 refund) on my return. It took some time and many letters but, I did get my refund.

I used to do taxes for H&R Block and my boss always said the IRS considers that their money.

 

[jedi]

Id be fine just writing a check at the end of the year......They make it so difficult.

It's the .gov we are talking about here EVERYTHING they do is difficult.
I'm going to try this method in 2012 and see how it goes. Looks like I wil have to make four $900 payments this year should be easy enough.

**EDITT**
reading PAMom's message I think I'll play it safe and do four $1K payments to enusre I get to the 90%+ tax liablity. I've been tracking my tax liablity for several years now and I'm pertty sure what it will be so I think I' ready to do it this way and keep MY MONEY!

-Jedi

 

[PAMom]

I forgot to mention if you are a farmer or fisherman (can't remember what % must be derived from those occupations) you can avoid paying any estimated taxes but you must file your return and pay the tax due by March 1. My Dad was a dairy farmer and he always did this. You have to be ready to pay the piper then but most people who are self-employed know where they stand. I do remember that my Dad was a bear this time of year. He always growled about it but he knew the end result.

I believe the IRS is trying to do away with this provision if they haven't already. Not sure since I don't do farm taxes any more.

 

[jedi]

Thanks PAMom but not a farmer or fisherman so that won't apply to me. =)

 

[IndianaSlim]

I'm a farmer and pay all at once usually in Feburary. The reason they let us get away with not paying the estimated taxes makes sence as NOBODY knows how much money I will make (or potentially lose) going into a certain year. This is by far NOT my favorite time of year.

 

[csnoski]

What She Said

If you have no withholdings, definitely file estimated payments. The IRS takes a dim view of you hanging on to 'their' money. If you meet all of last year's tax liability or 90% for the present year no penalty is assessed.

If you get into the penalty area, the penalty is figured on every quarter that you are short and then the interest is figured daily for each quarter.
I don't see how you could come out ahead as their interest rates are much higher than you could earn. Don't remember what they are right now.

I had a problem with this last year. I had income in the last quarter that I paid one estimated payment on at the end of the year. Because of the amount the IRS figured I had received it all year and penalized me for non payment for the entire year, even though I had no tax due (in fact an $80 refund) on my return. It took some time and many letters but, I did get my refund.

I used to do taxes for H&R Block and my boss always said the IRS considers that their money.

PaMom nailed it and was much more detailed in her response than I would have been.

I am waiting for them to come after me since I don;t make 4 equal pmts. I re-calc every qtr the rest of the year since my income is mostly dependent on my success in the stock market. Each pmt is TECHNICALLY for 3 mos' income...April est is for Jan-March, June estd is for apr-june, etc.

Thx...you just reminded me I have to write some checks and get to the post ofc!

 

[jedi]

Thx...you just reminded me I have to write some checks and get to the post ofc!

Write checks? Why not just pay electronically via checking/saving?
They do have that option as well. Here is the website for enrollment.

https://www.eftps.gov/eftps/

-Jedi

 

[bigworm]

Interest rates aren't high enough

 

[jedi]

Interest rates aren't high enough

For what? The headache of having to do estimated taxes?

-Jedi

 

[csnoski]

Thx

add

Write checks? Why not just pay electronically via checking/saving?
They do have that option as well. Here is the website for enrollment.

https://www.eftps.gov/eftps/

-Jedi

Will have to check out. I pay nearly all my bills online but when I started having to do the estimated stuff (10 yrs ago) it seems to me I read I couldn't do my est'd taxes this way. Haven't gone to your link yet, but I prefer pushing payments from my cr union acct. I don't log onto vendors sites and pay on them...well, I guess I do that with the BMV. Anyway, will look into it. Thx again and I hope you don't get banged too badly. OR, was that your grand plan for 2012? I'd have to go back and re-read your post. If you just rolled in '12 with no withholding, you can redeem yourself by changing the w-4 and making an est'd pmt for 1st qtr by 4/15.

In fact, I suppose you could continue 0 w/holding as long as you paid qtly, but w interest rates so low, it'd hardly be worth the effort.

In fact, you would still have time to make a pmt by 1/15 and perhaps mitigate the penalty and interest somewhat for '11.

 

[csnoski]

You are ok

OK...just read your original post again. Thank goodness you figured this out so soon. Just get your w-4 changed. It's only 3rd wk of Jan. You will be OK overall.

 

[jedi]

OK...just read your original post again. Thank goodness you figured this out so soon. Just get your w-4 changed. It's only 3rd wk of Jan. You will be OK overall.

Sign up with https://www.eftps.gov/eftps/ is free and you just link your bank account with them then you can pay "anytime" and/or setup advance payments up to 180 days into the future. The registration was pretty easy and painless. It's a 2 part from what I understand. You sign up, then wait to get some PIN in the mail and then complete the registration process.

Once you are registered you can even do the payment over the phone. They will they take the money out of whatever bank account you have linked to them.


In terms of 2011 taxes I will be OK. What I am thinking of doing (am doing) in 2012 is having no withholding so I will pay the estimated taxes in 2012 each quarter. Yes the interest are low but I figure I rather get .79% with ING DIRECT than nothing.

-Jedi

 

[bigworm]

interest rates arent high enough to make much on your money sitting in the bank

 

[Stringtown]

One thing I didn't see mentioned, if you pay in as much as your 2011 liability, there will not be an under estimated tax penalty.

 

[jedi]

interest rates arent high enough to make much on your money sitting in the bank

True I figured it's about $10 in interest that I can make on the money in a savings account if I hold on to it and pay via the estimated taxes.
From the additional reading while you can pay online via a bank transfer do I still have to mail each quarter from IRS form?

Still looking into it but perhaps I just lower my witholdings to what I have in 2011 allow them to take taxes from me until they get to around 3500 (close to what my 2011 tax liablity was) and then bum up my withholding near the fall like I did this year.