What Is It?
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, and rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if not enough tax is being withheld from your salary, pension, or other income.
Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or by making estimated tax payments, you may be charged a penalty. Also, if you do not pay enough by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your tax return.
Who Must Make Estimated Tax Payments?
Generally, if you had a tax liability for the previous tax year, you may have to pay estimated tax for the current tax year.
The General Rule
You must make estimated tax payments if you expect to owe at least $1,000 in tax for the current tax year (after subtracting withholding and credits), and if you expect your withholding and credits to be less than the smaller of:
- 90 percent of the tax to be shown on your current year's tax return
- 100 percent of the tax shown on your prior year's tax return (your prior year's tax return must cover all 12 months.)
Exceptions to the General Rule
- If at least two-thirds of your gross income for either the prior tax year or the current tax year was or is from farming or fishing, substitute 66 2/3 percent for 90 percent in the general rule.
- If your adjusted gross income in the prior year was more than $150,000 ($75,000 if you file married filing separately in the current year), substitute 110 percent for 100 percent in the general rule.
To Whom Do The Rules Apply?
The estimated tax rules apply to:
- U.S. citizens and residents
- Residents of Puerto Rico, the Virgin Islands, Guam, the Commonwealth of Northern Mariana Islands, and American Samoa
- Nonresident aliens
Tip: If you receive salaries and wages in addition to income not subject to withholding, you can avoid having to make estimated tax payments by asking your employer to withhold more tax from your earnings.
When Don't The Rules Apply?
You do not have to pay estimated tax if you meet all three of the following conditions:
- You have no tax liability for the prior tax year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12-month period
You have no tax liability for the prior tax year if your total tax is zero or you did not have to file an income tax return.
What about Married Taxpayers?
To determine whether you must make estimated tax payments, apply the rules given here to your separate estimated income. If you can make joint estimated tax payments, you can apply these rules on a joint basis.
You and your spouse can make joint payments of estimated tax even if you are not living together. You and your spouse cannot make joint estimated tax payments if you are separated under a decree of divorce or separate maintenance. Also, you cannot make joint estimated tax payments if either of you is a nonresident alien or if you have different tax years. Whether you and your spouse make joint estimated tax payments or separate payments will not affect your ability to choose between filing a joint tax return or separate returns.
Prior Year Separate Returns and Current Year Joint Return
If you plan to file a joint return with your spouse for the current year, but you filed separate returns for the prior year, your prior year tax is the sum total of the tax shown on each of your separate returns. You filed a separate return for the prior year if you filed as unmarried, head of household, or married filing separately.
Prior Year Joint Return and Current Year Separate Returns
If you plan to file separate returns for the current year, but you filed a joint return for the prior year, your prior year tax is your share of the tax on the joint return. You will file a separate return for the current year if you will file as single, head of household, or married filing separately. To determine your share, first figure the tax both you and your spouse would have paid had you filed separate returns for the prior year using the same filing status as for the current year. Then multiply your joint tax liability by the following fraction: Your separate tax liability / both spouses' separate tax liabilities
What about Estates and Trusts?
Estates and trusts also must make estimated tax payments. However, estates (and certain grantor trusts that receive the residue of the decedent's estate under the decedent's will) are exempt from paying estimated tax for the first two years after the decedent's death.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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