Wacky Estimated Tax Payments?

For the US federal income tax, if you pay no estimated payments but you owe less than $1000 tax, there will be no penalty.

If your tax is more than $1000, I guess your investment income was not negligible.

Each quarter you extrapolate your full year income from your income to date, then refigure the tax due, and pay enough so that payment N brings you up to N/4 of what the total tax will be. If the payments end up being notably uneven, when you file your tax return you include form 2210 including schedule AI to explain why.

Publication 505 sort of explains this, as do the instructions for forms

I did that once when a company got bought-out in December. I decided filled out 2210 in a tax program entering a lot of data. Then it wanted a whole other set of data. You have to split your income into quarters, and you have to split your deductions into quarters. Guess what? Some of the deductions happened to fall into Q4. And my methods were not all that efficient Since I had "invested" so much time into form 2210 already, I went ahead. There might have been a third phase. Not sure.

Well, since extra income gets taxed at a higher rate, there was still a penalty. So I think I might have paid $20 in penalty vs the $30 I would have paid if I had not gone thru that.

To avoid a penalty and pay the least amount possible each quarter yolu shojld use the ANnuyalized Income Method. You can get a *2210 tax calculator* on the web that does all the calulatiions for you and provides all the line number entries for the 2210 and its AI. If you are not making much income stating itit quarterly shouldn't be such a big job.

ed

Sure. You computer 2210 for income up to March 31, June 30, August 31, and December 31 and pay the minimum to avoid penalty.

You'll probably overpay slightly, because brackets might be raised a small amount for 2008 and arent announced until October or November.

Note that the "equal installment method" works better if you expect income scewed toward the first half of the year. The annualized method is better for second half income.

As I read it, 2210 is based entirely on 2007 taxes. Since my 2008 earnings will no more than 5% of my 2007 earnings, the refund would be pretty big. Am I reading it correctly?

No, you are not.

You file it in 2008 after the fact, not now.

The IRS expect 4 equal estimated payments. If you have unequal estimated payments because of unequal income throughout the year, you can file the form 2210AI annualized method with your 2008 taxes to show why your payments were not equal.