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DW has to pay estimated quarterly taxes. Has never been a problem in the past, income has been fairly consistent. However, this year, she is expecting anywhere from 15-30% decrease.

She obviously doesn't want to keep paying at the old rate, would seriously hurt her cash flow. But doesn't want to underpay because there could be penalties involved.

Before I forget, remember that even if her income was constant her tax bill would go up in 2013 because of the expiration of the payroll tax holiday.

The most accurate way for someone in her situation is to use the annualized income method of calculating her required payments. It's described in Pub 505.

A less cumbersome approach would be to assume an "X" percentage decrease in income, apply the higher S/E tax rate, and base her estimates on that, if it fits the budget. The underpayment penalty is only interest at an annual rate of 3% (currently) from the due date of the ES payment to 4/15/2014 or the date the underpayment is satisfied, whichever comes first.

Rule Your Retirement Home Fool
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