Estimated Taxes
Federal
The federal income tax system is a "pay as you go" system. In general you're required to pay tax over the course of the year rather than waiting until April 15.
The rule is you have to pay estimated tax if your withholding doesn't cover 90% of your tax liability. But there are exceptions:
1. No estimates are required if the amount due after subtracting withholding and credits will be less than $1,000.
2. In general, no estimates are required if your withholding and credits add up to at least as much as your prior year's tax. This is called the prior year safe harbor.
3. If your adjusted gross income above $150,000 on the prior year’s return ($75,000 if married filing separately), you need to pay 110% of the prior year’s tax (not just 100%) when applying the prior year safe harbor.
Estimated tax payments are due quarterly, on 15th day of April, June, September and the following January.
When you make estimated tax payments you need to enclose Form 1040-ES, Estimated Tax Voucher. Form 1040-ES comes with a worksheet you can use to estimate how much tax you'll owe for the current year. But you don't have to fill out the worksheets unless you think they'll be helpful. A simplified method is:
1. Look at each number on the prior year's tax return and ask yourself if this year's number is likely to be significantly different. Ignore differences in wages because there will be a corresponding difference in withholding. Use rounded numbers and don't worry about minor changes.
2. Add up all the differences to see how much larger or smaller your taxable income will be for the current year.
3. Apply the tax rates to see how much difference this will make in your income tax. (If the difference results from a capital gain, apply the capital gain tax rates.) Round the number up or simply tack on an added amount if you want to increase your comfort level about avoiding a penalty.
State
Most states require estimated tax payments on the same schedule as the federal payments.
If you itemize deductions, it may be to your advantage to make your fourth quarter estimated tax payment in December, not January, so you can deduct it a year earlier.
California
Generally, you must make estimated tax payments if you expect to owe at least $200 ($100 if married filing separately) in tax for 2005 (after subtracting withholding and credits) and you expect your withholding and credits to be less than the smaller of:
1. 90% of the tax shown on your 2005 tax return; or
2. The tax shown on your 2004 tax return including AMT.
Use Form 540-ES as a guide for figuring your estimated tax.
Payment options:
Web Payment – To make a payment online or to schedule a future payment (up to one year in advance), visit Website at http://www.ftb.ca.gov/ and search for “Payment options.” Do not mail the voucher if you make a Web payment.
Credit card – Visit Website at http://www.ftb.ca.gov/ or call (800) 272-9829. You will be charged a convenience fee of 2.5% for this service. Do not mail the voucher if you pay by credit card.
Check or money order – make your check or money order payable to “Franchise Tax Board.” Write your social security number and “Form 540-ES 2005” on it and mail to the address on the voucher.
The federal income tax system is a "pay as you go" system. In general you're required to pay tax over the course of the year rather than waiting until April 15.
The rule is you have to pay estimated tax if your withholding doesn't cover 90% of your tax liability. But there are exceptions:
1. No estimates are required if the amount due after subtracting withholding and credits will be less than $1,000.
2. In general, no estimates are required if your withholding and credits add up to at least as much as your prior year's tax. This is called the prior year safe harbor.
3. If your adjusted gross income above $150,000 on the prior year’s return ($75,000 if married filing separately), you need to pay 110% of the prior year’s tax (not just 100%) when applying the prior year safe harbor.
Estimated tax payments are due quarterly, on 15th day of April, June, September and the following January.
When you make estimated tax payments you need to enclose Form 1040-ES, Estimated Tax Voucher. Form 1040-ES comes with a worksheet you can use to estimate how much tax you'll owe for the current year. But you don't have to fill out the worksheets unless you think they'll be helpful. A simplified method is:
1. Look at each number on the prior year's tax return and ask yourself if this year's number is likely to be significantly different. Ignore differences in wages because there will be a corresponding difference in withholding. Use rounded numbers and don't worry about minor changes.
2. Add up all the differences to see how much larger or smaller your taxable income will be for the current year.
3. Apply the tax rates to see how much difference this will make in your income tax. (If the difference results from a capital gain, apply the capital gain tax rates.) Round the number up or simply tack on an added amount if you want to increase your comfort level about avoiding a penalty.
State
Most states require estimated tax payments on the same schedule as the federal payments.
If you itemize deductions, it may be to your advantage to make your fourth quarter estimated tax payment in December, not January, so you can deduct it a year earlier.
California
Generally, you must make estimated tax payments if you expect to owe at least $200 ($100 if married filing separately) in tax for 2005 (after subtracting withholding and credits) and you expect your withholding and credits to be less than the smaller of:
1. 90% of the tax shown on your 2005 tax return; or
2. The tax shown on your 2004 tax return including AMT.
Use Form 540-ES as a guide for figuring your estimated tax.
Payment options:
Web Payment – To make a payment online or to schedule a future payment (up to one year in advance), visit Website at http://www.ftb.ca.gov/ and search for “Payment options.” Do not mail the voucher if you make a Web payment.
Credit card – Visit Website at http://www.ftb.ca.gov/ or call (800) 272-9829. You will be charged a convenience fee of 2.5% for this service. Do not mail the voucher if you pay by credit card.
Check or money order – make your check or money order payable to “Franchise Tax Board.” Write your social security number and “Form 540-ES 2005” on it and mail to the address on the voucher.
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