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Estimated tax payments needed?

So, if I understand, I will be penalized if I underpay taxes by a certain amount; and the formula they use is I have to have paid at least 100% of last year's taxes, or 90% of the tax that is owed of the current year, right?

I made about $34K in 2009, and owed about $3,400 in taxes. But in 2010, my income will go up almost 1,000% compared to 2009.

It seems, every year I end up underpaying taxes (though not enough to be penalized), I think largely due to the fact that I get a substantial amount of income from dividends, in which taxes are not taken out from the payout. I assume in 2010, I'll have underpayed as well. But as long as I paid more than $3,400 in taxes (100% of my

2009 tax bill), I should not be penalized, right? So even if I owe $80,000 in taxes in 2010, and only paid $50,000.... which is a SUBSTANTIAL underpayment, will I still not get penalized?

I already know, in advance, that my 2010 income will be significantly more than my 2009 income, due to a career change, so is there any stipulation in the tax code that says I'd still get penalized due to the fact that I could have anticipated this drastic increase in income, despite the fact that I shouldn't be penalized according to the formula (paid an amount that's at least 100% of last years tax bill)?

Reply to
martin lynch
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No. As long as you had "some" tax liability for 2009, if you pay at least that amount as 2010 estimate, it doesn't matter how much of a check you write in April 2011. But it's good planning to make sure you have the money by then. For example, you might buy a T-bill that matures in early April 2011.

Reply to
Tom Healy CPA

Right, you won't get penalized. Because your AGI will be over 150k, you must pay 110% of last year's taxes. Paying 50k is too much. Yo only need to pay 110% of $3400, whatever that is. My thought is this: take one million exemptions at work so that no tax is withheld, and pay 1/4 of 110% of $3400 every quarter through EFTPS. Think about this -- assume you withhold about $300 in federal taxes every month to add up to 110% of $3400, if you lose your job before the year is up, you wouldn't have paid the full amount of taxes through withholding. Or you could withhold 110% of $3400 in the first paycheck, and nothing after that.

Don't forget about state taxes. Most likely your state also has a prior year safe harbor provision, but see my post in the thread "Safe Harbor?" also going on right now.

If you expect your 2011 income to be low again, you might want to pay your 2010 state taxes in full so as to be able to deduct them against your federal tax due. Then again, if you pay too much state tax you might end up in AMT, and under AMT you get no deduction for state tax paid.

Reply to
removeps-groups

There's some threshold where you have to have paid in 110% of your 2009 taxes; and I'm guessing that 1000% * $34K (or $340K) will exceed that.

Also, state income tax rules are not always the same as federal, so you'll need to check there, too.

--ron

Reply to
Ron Rosenfeld

The way to know for sure is to calculate the 2210 penalty form each quarter. And calculate it both the even-quarter and annualized way, because one way may have lower penalties depending on the timing of your income. What you need to do is collect a "snapshot" of your first quarter income through March 31 and fill in the first column of the 2210AI. From experience, it much more convenient to assemble these snapshots on a as-you-go basis rather than dig them up next April. Some financial firms dont keep a full 16 months of statements online.

Reply to
rick++

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