MONEY MANAGEMENT

From the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®

ARE YOUR 2007 ESTIMATED TAXES ON TRACK?

(April 1, 2007) -- Most — but not all — taxpayers need to settle up with Uncle Sam on April 17. Those who are required to pay estimated taxes aren’t quite as lucky. Payments are required four times a year — and the first payment for the 2007 tax year is due on April 17.

If you’re wondering who needs to make estimated payments, how much to pay and when, and what happens if you don’t comply, the Virginia Society of CPAs has the answers.

Who must pay estimated taxes?

An individual is required to pay estimated taxes if your tax liability for the year, after credit for withheld taxes, is $1,000 or more. Estimated tax is the method the Internal Revenue Service (IRS) uses to collect tax money on a pay-as-you-earn basis for income that is not subject to withholding. Taxpayers who have other significant income that is not subject to withholding may be required to pay estimated taxes. Examples include investment income, alimony, and rental income.

When do you pay estimated taxes?

For the purpose of estimated taxes, the IRS divides the year into four payment periods. You may pay your 2007 estimated tax in four equal amounts according to the following schedule:

1st payment — April 17, 2007
2nd payment — June 15, 2007
3rd payment — September 17, 2007
4th payment — January 15, 2008.

Each payment represents roughly one quarter of the tax you will owe for the year.

How much estimated taxes do you need to pay?

In most cases, the safest route to paying enough in estimated taxes is to use the prior year safe harbor. That means if your adjusted gross income for 2006 was $150,000 or less and you are either single or married filing jointly ($75,000 for married taxpayers filing separate returns), you can avoid paying a penalty by paying estimated taxes equal to 100 percent of the amount of your total tax shown on your prior year’s tax return. If last year’s adjusted gross income was more than $150,000, your safe harbor amount is 110 percent of the amount of total tax shown on your prior year’s tax return.

If, based on your situation, you believe that using the prior year’s safe harbor may result in overpayment, there is another option available. You also avoid paying a penalty when your estimated payments for 2007 equal 90 percent of this year’s income tax liability.

Are there options to paying estimated taxes?

Not looking forward to making four tax payments a year? If you or your spouse has wage income in addition to your untaxed earnings, you may be able to arrange for extra withholding to cover your estimated tax bill. There are two ways to do this. You can reduce the number of allowances you claim or you can request that a specific “additional amount” be withheld from your paycheck. Since it’s difficult to determine how much changing your allowances will affect your withholding, it’s best to calculate your estimated tax bill and request to have that amount withheld over the course of the year.

To file your estimated taxes, use Form 1040-ES, Estimated Tax for Individuals. This form includes instructions, a worksheet, and four numbered payment vouchers.

What happens if you don’t comply?

If you do not pay enough estimated tax by the due date of each of the payment periods, you will be assessed an estimated tax penalty that is due on your tax return filing date. The interest rate used to compute the penalty changes quarterly based on market conditions. The penalty applies even if you are due a refund when you file your income tax return.

Need help?

If you’re not sure whether you are on track with your estimated tax payments, you should consult with a CPA as soon as possible. If you wait until later in the year to catch up, you could face a late payment penalty, even if the total amount you pay covers your tax liability.

 

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.

 

Lifetime Financial Planning, Inc.

Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional

2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171

208 South King Street, Suite 201, Leesburg, Virginia, 20175

www.lifetimefp.net

Phone: (703) 779-0515 - Fax: (703) 779-7815 - E-mail: info@lifetimefp.net
 

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