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I have read about Estimated Tax Payments in this board's FAQs but remain confused about how much to pay by when.

Senario: On our 2002 income (less than $150,000), we plan to pay 100% of our 2001 tax obligation through a combination of withholding plus 4 equal and timely Estimated Tax payments. (The major portion of our 2002 income will have been received in the first quarter -- NO taxes were withheld were from this portion.)

My hiccup with FAQs Estimated Taxes article as it pertains to the above senario:

. Our "safe harbor" appears to be 100% of our 2001 tax obligation. (To be paid in 4 equal and timely Estimated Tax payments and no matter how much we may still owe April 2003.)

But the article also indicates -

. Each quarter stands alone, and income spikes in one quarter do not allow putting off payment of taxes due to another quarter. (I could interpret that to read that we made more money in the first quarter and therefore we owe more taxes for the first quarter than we will have paid in with the first quarter's Estimated Tax payment.)

Questions:
. Is 100% of our 2001 tax obligation correct?
. Are we just lucky to have made the bulk of income in the first quarter and won't have to pony-up for all those taxes until it catches up with the equal and timely payments of the later quarters?
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Each quarter stands alone, and income spikes in one quarter do not allow putting off
payment of taxes due to another quarter.

I don't know what this means either.

(I could interpret that to read that we made
more money in the first quarter and therefore we owe more taxes for the first quarter
than we will have paid in with the first quarter's Estimated Tax payment.)

Questions:
. Is 100% of our 2001 tax obligation correct?


Yes for you that appears to be the best

. Are we just lucky to have made the bulk of income in the first quarter and won't
have to pony-up for all those taxes until it catches up with the equal and timely
payments of the later quarters?


That's exactly correct. However, if your W-2 income stops and you have to make it up with more 1099 income in later quarters it will leave you with underpayments in the first quarters. The penalty is only simple interest on the underpayments at 6%. ed
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Each quarter stands alone, and income spikes in one quarter do not allow putting off payment of taxes due to another quarter.

(I could interpret that to read that we made more money in the first quarter and therefore we owe more taxes for the first quarter than we will have paid in with the first quarter's Estimated Tax payment.)


Yes. So in the simplest case, let's say I am not working and had all $40k of my gains from stocks in the 1st quarter. For estimated taxes, I would have to pay all of the estimated taxes in the Q1 estimated taxes payment, instead of spreading the total out between the 4 quarters.

But as you pointed out, your other option is the safe harbor rule to pay 100% (depending on your income level) of your 2001 taxes, in which case you can just spread those out equally.

I don't think the estimated taxes take into account you consistently making all of your money in the 1st quarter. But take a look at the forms you would have to fill out at tax time and run through a sample now. It's been 2 years since I had to fill that one out, so I don't remember the exact wording.

4aapl
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Our "safe harbor" appears to be 100% of our 2001 tax obligation. (To be paid in 4 equal and timely Estimated Tax payments and no matter how much we may still owe April 2003.)

That's a combination of withholding and estimated tax payments. Thus, if your 2001 total tax was $10,000 and you've had $2,500 withheld by 3/31/2002, you don't have to make a 4/15/2002 ES payment even if you had a gabillion dollars in 2002 capital gains on 1/1/2002.

But the article also indicates -

. Each quarter stands alone, and income spikes in one quarter do not allow putting off payment of taxes due to another quarter. (I could interpret that to read that we made more money in the first quarter and therefore we owe more taxes for the first quarter than we will have paid in with the first quarter's Estimated Tax payment.)


I'm not sure what you were reading in the article, but that has no relevance to the 100% of last year's liability safe harbor. It would make a difference if you were doing annualized income for 2002, but you're not.

Questions:
. Is 100% of our 2001 tax obligation correct?


Yes. IIRC, you're 2001 AGI was under $150,000.

Are we just lucky to have made the bulk of income in the first quarter and won't have to pony-up for all those taxes until it catches up with the equal and timely payments of the later quarters?

Maybe not until 4/15/2003, depending on how your withholding for 2002 runs.

Phil Marti
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. Are we just lucky to have made the bulk of income in the first quarter and won't
have to pony-up for all those taxes until it catches up with the equal and timely
payments of the later quarters?

That's exactly correct. However, if your W-2 income stops and you have to make it up with more 1099 income in later quarters it will leave you with underpayments in the first quarters. The penalty is only simple interest on the underpayments at 6%.


Maybe I'm misinterpreting, but it sounds to me like you're saying that something happening later in 2002 could upset the prior year safe harbor payments that were made in time for the 4/15/2002 ES deadline. I don't see how that could happen. Of course, if anticipated withholding didn't happen later in the year, ES payments would have to be increased to take up the slack, but the withholding could be applied to the 2002 payment schedule under the actual date rule, thus leaving the taxpayer free from penalty.

Phil Marti
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So in the simplest case, let's say I am not working and had all $40k of my gains from stocks in the 1st quarter. For estimated taxes, I would have to pay all of the estimated taxes in the Q1 estimated taxes payment, instead of spreading the total out between the 4 quarters.

This is not true. You can spread that payment throughout the year without penalty. If it turns out that there is additional income not subject to withholding later in the year, there might be a need to do the annualized income calculation, but there's no need to pay 100% of the estimated tax with the 4/15 payment.

Phil Marti
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Phil said:Maybe I'm misinterpreting, but it sounds to me like you're saying that
something happening later in 2002 could upset the prior year safe harbor
payments that were made in time for the 4/15/2002 ES deadline. I don't see
how that could happen. Of course, if anticipated withholding didn't happen
later in the year, ES payments would have to be increased to take up the
slack, but the withholding could be applied to the 2002 payment schedule
under the actual date rule, thus leaving the taxpayer free from penalty.

Phil: Presume safe harbor for prior year is $10,000 and he's making 4 equal and on time installments of $1,000 each depending on $6,000 of withholding later in the year and using the Short Method. If he loses his job and has to pay installments in June, Sept and/or next January of $6,000 he's short on the first installment. Also, you can't use the actual date rule with the Short Method and the problem I posed was no withholding because he lost his job and had to free lance on 1099 income. Shifting to the Regular Method he's still short in the first quarter and using the AI Method is no help with large first quarter income. ed
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Phil's answer: This is not true. You can spread that payment throughout the year without
penalty. If it turns out that there is additional income not subject to
withholding later in the year, there might be a need to do the annualized
income calculation, but there's no need to pay 100% of the estimated tax
with the 4/15 payment.

You're correct about no need to pay the entire estimate in the first quarter. However, using the annualized income method only helps if you have MORE income in later quarters than in earlier quarters.

All the methods (except AI) presume you earned your income evenly over the 4 quarters. Your options are whether you average or apply withholding, but you can only use estimate payments in the quarters they are made. Applying withholdin the quarter withheld only helps if youhad more withholding in early quarters than in later quarters. The AI lets you use income in the quarters actually earned. ed
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Presume safe harbor for prior year is $10,000 and he's making 4 equal and on time installments of $1,000 each depending on $6,000 of withholding later in the year and using the Short Method.

Ah, the withholding is anticipated later in the year and then doesn't show up. Now I see. Thanks. I knew I must be missing something.

Phil Marti
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Ah, the withholding is anticipated later in the year and then doesn't
show up. Now I see. Thanks. I knew I must be missing something.

Phil Marti

Thank goodness I finally said it right. I couldn't have gone another round. (;>) ed
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Thanks everyone for your quick response.

I think we ARE fortunate to have received the major portion of our 2002 income (without taxes being witheld) during the first quarter. The equal quarterly Estimated Tax payments combined with withholding from our regular pension income nicely stretches out payment of 100% of our 2001 tax obligation as long as possible.

Phil: You surely wouldn't hear a peep from me if we had to pay taxes on "a gazillion" in capital gains this year! Have you any hot stock market tips to share?

The Tax Strategies Board alone is worth $30!
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Have you any hot stock market tips to share?

Sure. Buy low, sell high.

Lorenzo
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