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That raises a [novice] question about my understanding of the purpose and intent of estimated quarterly tax payments.

Oh, that one's easy. Cash flow for the gummint. We have a more-or-less pay as you go system since WWII. On the wage earner side that's accomplished through withholding. For income not subject to withholding there's estimated tax payments.

From Phil's Endless Warehouse of Useless Information we bring you an explanation for why the estimates are not quarterly even though people often refer to them as such. You'll note that the second estimate is due but 2 months after the first. That's because when the scheme was instituted the government's fiscal year ended June 30. When that was changed to September 30 we never changed the estimated tax due dates since it wouldn't have changed fiscal year cash flow and, except when we don't, we do it that way because we've always done it that way.

Expanding on the prior discussion, there are several methods available for avoiding a penalty for underestimating. My initial response followed my habit of looking for low-hanging fruit since it's the easiest. All are explained in detail in IRS Publication 505. Someone also mentioned state requirements. Often they differ from the Federal, so definitely check there too.

Finally, I also give a plug to edcosoft's spreadsheet. I don't use it every year, but in those years like 2010, when I know that my current year's income will be substantially less than the prior year's, I swear by it. In years like 2011, when I know that my income will be more, I use prior year liability to determine my estimates.

Rule Your Retirement Home Fool
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