The Motley Fool Discussion Boards
Financial Planning / Tax Strategies
|Subject: Re: Two Related Tax Issues||Date: 7/5/2008 5:40 PM|
|Author: edcosoft||Number: 101266 of 121219|
That fact notwithstanding, it is my understanding that paying taxes late on income earned in quarter one can still technically cause one to incur a penalty even if he ends the overall year being due a refund. .
Obviously you'll incur a penalty if you're late paying the amount due under any safe harbor (including the AI) method.
But not if each on time payment is at least 1/4 of last year's tax, or (if lower) the tax due for that quarter on the Annualized Income Method. With your method it could easily happen when you have a large gain in the 2nd or later quarter. If you had truly Annualized this wouldn't happen, and usually annualizing with your return will eliminate the supposed error, but, unfortunately, after the year's over most people can't reconnstruct their records on a tax quarter basis, and the computations are daunting, and even worse if one is subject to the AMT and phaseouts.
The chief advantage to Annualizing (in advance) is not to pay less for the year, because you will owe either the amount of last year's tax, or 90% of the full current years tax for your full year of withholding and estimates regardless, but its big plus is its ability to lower initial quarters' installments to less than either safe harbor, and calculate how much to adjust later installments to prevent a penalty.
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