WHAT – it’s almost tax time? Hey, Paul, we’ve merely passed the first seven months of the year. What is all this claptrap about tax time?
(While this article is aimed at the US Ex-pat and speaks to taxes “enjoyed” by US citizens and residents, some other countries impose similar regulations. Readers whose situation is not covered by this article would be well advised to check their country’s tax requirements.)
Unfortunately, it is true – it is almost tax time. Businesses, and individuals with unearned income (interest, dividends, pensions, etc.), know about estimated tax filings throughout the tax year. Far too many who do not, should learn about the USA’s estimated tax system. There may be a chance that you could have slipped into the abyss of estimated taxes in this poor economy. This is particularly bothersome for those who may have lost their job and are supporting themselves with unearned income (which includes unemployment benefits).
Not long after the federal income tax became law, Congress discovered that it could “do more” if taxpayers were on a “pay as you go” rather than a “pay all at the end of the year” plan. This means that, instead of waiting until the bitter end to pay federal income taxes (April 15 for individuals), the Internal Revenue Service requires periodic estimated tax payments. Most notably is the quarterly payment schedule (individuals: April 15, June 15, September 15 and January 15 of following calendar year).
Most employed people have sufficient taxes withheld from each paycheck. In that regard, they pay their estimated tax payments throughout the year. It’s a rather painless way to pay taxes – some don’t even realize they are paying throughout the year until they receive their Form W-2 from their employer the following January. With sufficient tax withheld, the taxpayer, under normal conditions, will not have anything to do or to worry about. Self-employed and unemployed persons may find things a little different.
The IRS’s general rule regarding who pays estimated taxes are:
You must pay estimated tax for 2009 if both of the following apply.
- You expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of;
- 90% of the tax to be shown on your 2009 tax return, or
- 100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.
Sole proprietors, partners, and S corporation shareholders – You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.
Corporations – You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.
Who Does Not Have To Pay Estimated Tax
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings.
Estimated tax not required
You do not have to pay estimated tax for 2009 if you meet all three of the following conditions.
- You have no tax liability for 2008
- You were a US citizen or resident for the whole year
- Your 2008 tax year covered a 12 month period
You had no tax liability for 2008 if your total tax was zero or you did not have to file an income tax return.
To me, as a tax accountant, the September 15 tax estimate has always been one of the most important. At that juncture in the business cycle / income cycle, one can see how things are going with enough time left in the tax year to make any required critical adjustments to your tax planning. The proper adjustment at the right time can mean the difference between paying penalties and interest on unpaid taxes or possibly providing an opportunity to lower your tax liability. You can either “catch-up” on what you owe or, if conditions warrant, reduce the amount of your September payment.
Doing nothing could be harmful to your wallet or purse. Take time to investigate where you stand today. A “small shock” today is definitely better than a “huge shock” next April.
I should mention here that the “tax break” everyone received early this year wasn’t a reduction to your tax liability on the April due date. The “break” was a change in withholding schedules, wherein anyone withholding federal taxes for individuals would be withholding less. The result for those receiving salaries and wages is a larger amount on the paycheck. While this was a well-meaning initiative to help stimulate the economy, it could turn disastrous for those with more than one source of income and/or those who file their taxes jointly with a working spouse.
There is any number of estimated tax calculators on the Internet. The IRS even has one for taxpayer use. For those of you who don’t consider yourself “small potatoes,” talk with your accountant, tax preparer, or whoever performs tax services for you. If you have none, and still think that perhaps, you should have, contact a Certified Public Accountant (shameless plug!) and share your concerns with him or her.
In any case, take a good, objective look at your personal case – even if you haven’t had to in previous years. You may be surprised. Don’t forget to look into any State (and possibly local/municipal/school district) income-related taxes you may be liable for, too.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.