Help on estimated taxes/penalties

snipped-for-privacy@yahoo.org (jack) posted:

Jack, it seems you've got the basis for estimated taxes mixed up with Adjusted Gross Income.

Let's start with this: if you have withholding from your salary in

2008, you reach safe harbor if the total amount withheld is at least 100% of the total income _tax_ you paid in 2007.

If you do not have tax withheld (either because you receive no salary - due to self employment, or income from investments), then you are responsible for making estimated tax payments. These should be based on your total anticipated income for 2008, and should be paid in 4 periodic payments -- due April 15, June 15, September 15 and January 15 of 2009.

But the payments, while based on your income, should not be equal to your entire income. Rather, they should be calculated on the amount of tax due from that income (starting at the 5% level, then 15%, and escalating eventually to the 35% level -- not counting payments for Social Security or Medicare, which are separately calculated on Form SE, tied to Schedule C - or C-EZ).

I would suggest you visit

where you can read online, the sections of Pub 17 which deal with when Estimated Tax payments are required -- and then, if you need to make such payments, check out Pub

505 for help in figuring methods of calculating your payments. If you find payments are necessary, then download Form 1040-ES, which includes instructions and a general guide to developing your estimated income, and the tax which would then be required.

Bill

It should read "Lets say your 2007 income tax was $200,000". Reading it over, my figures are rather high, but again, I am just looking for the concept. Sorry.

Fill out form 2110 to estimate penalties. Its in most tax software packages. The 2008 version should be coming out any week now.

There two ways to compute it (1) equal quarters (short & easy) and (2) annualized (long & hard). #2 is better if you have more income in the second half of the year.

The question is "what amount is the penalty figured on". The answer is "Simple interest at the current rate (6% right now) on the difference between what you have actually paid and what you should have paid in each installment until the date you paid it"

How you figure each installment and what is actually paid in each installment is a long story solved by completing form 2210 and possibly its Schedlue AI.

ed

Thanks, that's what I wanted to know. I don't care about the long story.

The penalty is on the shortfall between the actual tax paid and safe harbor value. So if you paid 200k in taxes last year, you need to pay

220k this year to be in safe habor. So in form 2210 9 = 220k Line 13 = Total withholding and estimated tax paid, let's say 180k Line 14 = Total underpayment = 220k-180k = 40k Line 15 = Penalty = Above line * 0.05057 Line 16 = Reduction in penalty if penalty paid before April 15 Line 17 = Line 15 - Line 16

So you see that the penalty depends only of the shortfall between the actual tax paid and the safe harbor value. So even your tax due is 1M or 100M, the penalty is still the same.

Also, observe that the interest is not a flat 8% but 5.057%. I think this is because each estimated payment is late by a different number of days: say the 4/15/2008 payment is paid on 4/15/2009 so that's interest for one whole year on 1/4 of the required annual payment; say the 6/15/2008 payment is paid on 4/15/2009, so that's interest for

10/12 of a year on 1/4 of the required annual payments; etc. Also, the rate for each quarter is I think tied to the 10 year bond rate or fed interbank rate, so it is not 8% for every quarter.

But if you have not paid by 4/15/2009, then the approximately 8% a year interest is levied on the entire tax due, which is on the entire

1M or 100M in my example above.

Now wait just a minute! If safe harbor is $1,000,000 and I only pay $5,000 I have to pay a penalty on the $995,000 if my actual taxes turn out to be $6,000?

That can't be right. I "think" I read that safe harbor can also be 100% of the actual taxes (rather than 110% of the previous years taxes).

If that is true than my penalty would be interest on $1,000? If so, then that is fair enough.

jack wrote: ...

... From 2210 instructions

smaller of:

2210 is pretty complex; only way you can be sure is to work through it.

There are a couple of exceptions and ways/reasons for waivers of any penalties as well. One would be best to read the actual instructions and apply realistic numbers to one's real situation rather than hypothetical musings.

If the prior year tax due was $200,000, and the current year tax due is $6,000, the safe harbor is $5,400, which is the smaller of 90% of this years tax, or 110% of last year's tax.

Note that the rules are more lenient for farmer's and fisherman (need only 66.66% of this years taxes), and those with a low AGI (need only

100% of last year's tax).

The determination of whether you have a penalty, and the simple form to calculate interest and pretty straightforward. It is only the long form with Schedule AI that is a nightmare. I still have not figured out how to calculate qualified dividends.

One last clarification, and I will go away.

In this example, if I paid $4,000 in estimated taxes; the interest would be on the shortfall from safe harbor; $5,400 less $4,000, or $1,400. (calculated as per form 2210 of course...)

...

That takes care of the "generally" part of the portion of the instructions I quoted. Possible problem and the reason I suggested to OP to read the details is in the paragraph and there's insufficient data in previous postings to know what actual situation might be.

That's why I essentially iterated the IRS suggestion printed a little earlier in the instructions for 2210 of

There's another Safe Harbor for those paying only Withholding (no cash estimate installments) and that's within $1,000 of current year's tax.

Also, if you use the 2210 AI you must compute it and the penalty and Pay it and attach it to your 1040, otherwise the IRS wil compute the penalty on the Regular Method and throw out your 2210..

Also, the 5.07% is not an average interest rate it is a composit FACTOR to multiply times your total underwithoholding ONLY if you elect to use the Short Method of figuring the penalty, which is that you paid no installments, or 4 equal and on-time installments, plus withholding which you agree to average and you don't pay the underwithholding until April 15, 2009. Following those rules it gets the same results as if you mulitiplied each quarter's underwithholding by the then current interest rate, from its due date to April 15,

2009.

I suggest anyone interested in usinig the 2210 AI Method get a good "2210 tax calculator" off the web. Realize that it requires computing your 1040, annualized for each tax quarter, complete with phase-outs, limitations, AMT applied to each quarter and that quarter's annualized AGI and taxable income. So don't look for a typical TT "how much was your wages" quiz-me form. It's at least as difficult as for you as using the "Forms method" of TT, but the calculator does al the figuring for you and spits out each quarter's requirement.

About the poster's questoin about Qualified Dividends Arter they are determined they go on Schedule D. To determine which are Qualified 1. Look at last year for that stock, 2 Presume if it is a domestic or foreign corporation that they are all Qualified , except 3. If they are from a limited partnership, partnership, your Schedule C or E, bonds, interest, muni's or bond funds, Hy-yeild funds,IRA or other pension distibution, they are NOT Qualified, and 4. You might have to guess (based on the above and it might be a portion are Qualified) for Q1,2 and 3 of 2210AI but their year end reporting (1099) will tell you..

ed

OK I'll bite.

On hat line of schedule D would you enter Qualfied Dividends?

Yeah, this is tedious. Your broker sends you an end of year statement listing regular and qualified dividends, but there's nothing every quarter. I can get a list of all dividends received within a given quarter, but I guess it's up to me to determine if it is qualified, based on the type of underlying company and holding period.

Well, Art, I misspoke slightly, presuming everyone knew about the Schedule D Worksheets.. You get the clue from line 22 of Schedule D which directs you to complete the Qualified Dividends and Capital Gains Tax Worksheet on page 38 ( of maybe its lpage 35 because it changes every year) of the 1040 instructions. On line 2 of that Worksheet it says to enter the amount ffrom line 9b of 1040 (which is your Qualified Dividends). It's the same line 2 on the longer Worksheet for Capital Gains tax calculations.

And, removeps, you are correct. The instructions for 2210 AI and Publication 505 tells you to make your best estimate. I doubt your guess based on my 4. points would create a penlty whereas their 1099 wouldn't, but I'd use whichever amount produced the lower final penalty.

And rick++, generally you may be correct about #2 (the AI Method) being better if you have higher income in the last part of theyear, but it is more pertinent for Anualization what non-reoccuring deductions you can put into the first quarter, such as carryover tax losses and other capital losses, IRA and 401K investments, Property tax and other "above the line" items, as well as many credits to a lesser degree.. From this it follows that pushing IRA or pension distributions and Capital Gains into the final quarter is advantageous.

ed

Plus, with some securities such as REITs or some foreign stocks, there is often a later revised 1099 with changes to the dividend numbers. If you have those kind of things, its best to wait until maybe March to file. Check your broker's website for the latest

1099; the mailed version is usually later. It seems to me that usually the changes are to your benefit for small amounts, so if you file earlier, you may not find it worthwhile to file the amended return to save a few dollars.

Just do your best guess - thats partly why they are called "estimated". Just apply the qualified percentage from 2007 to your 2008 estimate. Round up a bit if you are really worried.

Suppose the 2210 AI says you don't owe a penalty, but you don't attach it to your return. Then the IRS computes the penalty using the Regular Method and asks you to pay.

Are you stuck paying this inflated penalty calculation? Can you respond to the payment request by sending in a correct 2210 AI (with no payment)? Or can you perhaps file a 1040X with the 2210 AI attached to avoid paying the penalty?

Scott S.

Best was to have atached it to the original return.

At this point a 1040X is not needed or wanted. Attach a completed 2210 AI to a copy of the notice and return promptly to the address in the notice.