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:
General Rule
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.
Paul,
Are you still a registered USA, CPA – Tax Preparer & are you still able to compile non resident 1040NR Tax Returns & associated IRS/State Tax Requirements for limited USA income persons residing in Philippines ?
Thanks.
hello paul
wow this is so crazy how we are taxed in the usa.i think mine is based on 33 percent of what i make.i was upset to find out that my child support is not considered at all in our tax system.i know i pay roughly 7,000 a year and its not deductable.i get hit hard because i havent even been able to claim my son that was born in philippines,i guess this year i do have my wife and son so it should be alot lower.i have been paying between 6,000 to 10,000 a year filing single.i guess all the senators need a new toilet seat for 10 grand or so.wow what a great system we have.
Hello D. Bellini – I am a U.S. Certified Public Accountant (CPA) currently licensed in the States of California and Ohio.
Also, am registered tax preparer & e-filer with U.S. Internal Revenue Service (IRS).
Additionally, I’m a current member of:
American Institute of Certified Public Accountants (AICPA),
California Society of Certified Public Accountants (CalCPA), and
Ohio Society of Certified Public Accountants (OSCPA)
I’m familiar with and can compile U.S. tax returns for individuals and businesses. I try not to work with tax-exempt organizations.
As to you question regarding returns and requirements for limited USA income persons residing in the Philippines, I’d need more personal info to determine filing status, which forms to use, etc. Unfortunately, that’ beyond the boundaries of LiP Web Magazine.
If you desire more info or service, let me know and I’ll contact you via email. Thanks for your question – good start to comments!
Hi Ron – Remember that the U.S. Congress has the power of taxation, and that many congressmen are lawyers. Lawyers can practice with tax cases and many congressmen add riders or amendments to bills that favor this or that policital donor. Remember that when you next step into a voting booth! 😀
(U.S. taxation could be worse!)
Thanks Paul for your prompt LIP website reply.
YES I would appreciate further info. as I currently have USA Rental + Mortgage Interest etc. Income from both NY State + Texas & correctly IRS file both federally & NY State as required with my husband “married filing separately” – effectively connected” 1040NR USA tax returns each year.
Am both Philippine Resident balikbayan who spends 6 months a year in Philipines & 6 months in Australia where I also hold Citizenship.
Can we correspondent in more detail more regarding your services & USA overseas investor tax preparation experience via my email xxxxxxx ?
Editor’s note: I do not allow e-mail addresses to be posted in the comments. My experience is that when I do, the person ends up getting a ton of unwanted e-mails, and writes to me to remove the e-mail, so I just don’t allow it. d.bellini, I have sent Paul your e-mail address so that he can contact you. But, I ask nicely, please do not post your e-mail address in the comments. Thank you.
Hi Master Chief,
How are you on Canadian Taxes???
Will you be “helping” a few people with their taxes???
I can’t speak for Paul, but when it comes to Canadian taxes, I’m all for ’em! Now, I’m not in favor of US taxes, though! 😉
Hi Tyleen – I think that in my career as a CPA, I’ve only compiled two or three Canadian returns; one of them being for sales taxes. So, I’m pretty limited in the “Great White North” 😉
As to “helping,” it depends on the definition of help. I will throw a freebie out there every now and then (like this article), but any additional “help” would have to be requested and discussed via direct email (not on the LiP Web Magazine). I receive readers’ comments via email as well as on-line attached to the article, so if someone asks for help, I’ll get in touch with the person(s) in need via email.
Good questions! Thanks, Tyleen.
Hi Paul,
Marie and I plan to have a power of attorney written so my daughter can sign our tax returns for us next April. Do you forsee a problem with this? We plan to do this just next year as our taxes will be simple after that time.
P.S. It seems that you are very knowledgeable about taxes and related subjects. We are fortunate to have such an sharp guy on this website.
Hi Tom – Thanks for the vote of confidence.
The IRS is a stubborn mule when it comes to tax issues, and power of attorney is one. They have their own way of going about it. You and Marie will have to file an IRS Power of Attorney form following specific instructions. A standard civil POA or Limited POA will not suffice.
If you wish, I can contact you via email (I have your email address) for further help (e.g., form & instructions in pdf, etc.).
Hi Paul,
At this time of year its good to be a Brit because the Tax rules are much simpler there! If you do not go back to UK as an ex pat for more than one sixth of the time that you are away i.e 2 months out of 12, after the first year you can get a Zero Tax Code Status! Thats what I did when I worked over seas! If you are not domiciled and get no income from the UK then you do not pay any tax at all! I have not paid any UK Tax since 1979 when I left the Army and went to work abroad!
Yup, its good to be a Brit especially with such a tax system!
Hi Chris – You’ll not get any argument from me on UK taxes! You’re indeed fortunate to be in the zero tax status, and are the envy of the USA expats.
US citizens have to report world-wide income when filing their taxes, and have to do a paperwork battle to get credit for any income taxes paid to other countries. Government greed 😀 .
Paul, I have an unusual situation, I flew out of the USA on Dec 31st of 2008, and landed in the Philippines January 2nd of 2009. No income from any US sources, My wife owns two laundry shops here in the Philippines, and I am head plumber, electrician, washer repairman, etc. I do all the work, she gets the glory and the money! We have three kids, one of which was born a month ago, and we are patiently awaiting the NSO birth certificate so we can get a US passport etc for him in Manila. As I see it I am NOT required to even file a tax return. Is that correct? Thanks
Hi Dave – Yes, that’s quite a situation you’re in. You may still have to file a return for 2008.
US Income Tax is determined on worldwide gross income, not just US-sourced income. This applies to citizens regardless of where they are located, resident aliens, and a few other categories.
If your gross income was less than an amount specified by the IRS that depends on your filing status, age and a few other issues, you may not have to file. As an example, a single filer under the age of 65 can have a gross income under $8,950 (worldwide) and not have to file. $8,950 or more and yes he/she has to file.
You can check your situtation/filing requirements out on the IRS website – there is an interactive check at address:
http://www.irs.gov/individuals/article/0,,id=96623,00.html
You can also check “CHART A” in the instructions for Form 1040 to determine whether you are required to file, at address:
http://www.irs.gov/pub/irs-pdf/i1040gi.pdf page 7 for “If you need to file” and “CHART A” on page 8.
If these don’t answer your question/fit your situation, let me know and I’ll contact you directly (the administrator has your email address – I’ll get it – do not put it in a reply comment).
Unofficially, on the surface, I’d say that you probably don’t have to file. DO NOT TAKE THIS AS TAX ADVICE. Check the web addresses above to make sure.
BTW, Dave, I forgot to mention that the same goes for 2009, but the amounts you can make and still not file will increase a little.