Personal Estimated Income Taxes – Have You Paid Yours?

Steve Ganns,, discusses Personal Estimated Income Taxes - Have You Paid Yours?Many taxpayers find that their tax preparers tell them they have to pay quarterly taxes. Why is this so? Well, here’s what the IRS has to say about paying your taxes:

  • We have to pay taxes based on the income we make.
  • We must pay our taxes evenly throughout the year or else the IRS will charge a penalty.

So, if my total tax bill is $10,000, and I don’t want to pay it until April 15th when I file my tax return, the IRS will not come after me and throw me in jail.  However, they will charge me an estimated tax penalty.

How do we avoid this penalty?

You must pay 90% of whatever taxes you owe for a given year evenly throughout that year. One of the most common ways to pay that tax is through withholdings. Most people do this through their W2s or pensions. The other way is by making quarterly estimated tax payments.

In our example above, where the total tax bill was $10,000 for a given year, you would have to pay $9,000, either EVENLY throughout the year in estimated taxes, or through withholdings.

How do we know what to pay?

Many people don’t know exactly what their taxes are going to be before the year is over. The IRS provides a safe-harbor for this.

If your adjusted gross income (AGI) in the prior year was $150,000 or less, then you simply pay the exact amount of your total tax bill for the prior year, through estimated taxes or withholdings.  This will avoid any estimated tax penalty no matter how much you end up owing on April 15th.

If your AGI in the prior year was above $150,000, then you must pay 110% of the prior year’s tax. Above $75,000 if married filing separately.

So, let’s say the prior year’s AGI was $160,000, and the tax paid was $20,000.  And let’s say that in the current year, you hit the lottery and won a million dollars.  To avoid a tax penalty, all you would have to do is pay 110% of last year’s tax ($22,000) in evenly spaced estimated tax payments or through withholdings. Then, of course, you would have to pay the rest of the tax due on April 15th.

The Estimated Tax Penalty

The estimated tax penalty is based on an interest rate. Currently that interest rate is 3%. Someone owing $10,000 and not paying their estimated taxes would pay less than $300 in estimated tax penalty since the interest is computed on each quarterly installment.

If you’re not sure whether or not you should be paying estimated taxes, or if you paid a tax penalty in the past, please contact your tax preparer for an explanation of this. You can also contact us at any time at 914-682-7007.

Stephen J. Ganns

Stephen J. Ganns, CPA


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