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Alright, I've read the FAQ, read through IRS Pub 505, and I'm still confused about one point.

The safe harbor for estimated taxes can be one of the following items:

1) Federal Tax Due - W-2 Withholding - credits must be less than or equal to $1000

2) Federal Tax Due - W-2 Witholding - credits - Total Estimated Tax paid anytime during 2001 must be greater than or equal to 90% of Total Federal Tax Liability

3) W-2 Withholding + credits must be greater than or equal to 2000 Federal Tax Liability

Am I mistaken on any of these? I am married with AGI less than $100k.

MrDP
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Alright, I've read the FAQ, read through IRS Pub 505, and I'm still confused about one point.

The safe harbor for estimated taxes can be one of the following items:

1) Federal Tax Due - W-2 Withholding - credits must be less than or equal to $1000

2) Federal Tax Due - W-2 Witholding - credits - Total Estimated Tax paid anytime during 2001 must be greater than or equal to 90% of Total Federal Tax Liability

3) W-2 Withholding + credits must be greater than or equal to 2000 Federal Tax Liability

Am I mistaken on any of these? I am married with AGI less than $100k.


I would say it differently, but you're almost correct. The $1000 refers to the check you may have to write, not credits.
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2) Federal Tax Due - W-2 Witholding - credits - Total Estimated Tax paid anytime during 2001 must be greater than or equal to 90% of Total Federal Tax Liability

This is worded incorrectly, though it's clear you have the concept right.

It should be: "Federal Tax Due - W-2 Withholding - credits - total estimated tax paid (up to 1/15/2002) must be less than or equal to 10% of Total Federal Tax Liability.

Also, for this exception to apply, (1) you must have made equal, timely estimated tax payments, or (2) you must use the annualized income worksheets to demonstrate that you met the safe-harbor each quarter.

You don't have to meet the same safe-harbor exception each quarter, you can choose the safe-harbor which is best for your set of circumstances.

Ira
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To put it another way. There are 3 "safe harbors". "Taxes" are total owed with your return after deducting credits:

1. 90% of current year's taxes paid by withholding and/or 4 equal and on time installments.

2. Within $1,000 of current year's taxes paid by withholding ONLY.

3. 100% (or this year, 110% if last year's AGI > $150K) of last year's taxes paid by withholding and/or 4 equal and on time installments.

These are "Safe Harbors" because you don't have to file a Form 2210 if you meet any one of them, regardless of how much final tax you owe with your return. The installments don't have to be equal if they are cumulatively more than 1/4 of the total each quarter ( that is, more than 1/4 paid in the first quarter, 1/2 in the first two quarters, etc.)

If you miss one of these safe harbors in AMOUNT, you can figure your penalty on the Short Method and complete only page 1 of Form 2210. If you don't complete page 1 of Form 2210, the IRS will figure your penalty for you but may not use #3 safe harbor.

If you pay uneven or late installments, you must complete page 2 of Form 2210 (Regular Method) which allocates 1/4 of your total tax liability under either #1 or #3 above to each quarter and applies installments and withholding to meet your estimated tax liability for each quarter. You or the IRS can figure the penalty. You can apply each kind of withholding (W-2, 1099, etc) as paid, or averaged equally over the 4 quarters.

If you think it is advantageous you can complete Schedule AI of the Form 2210 which Annualizes your income (and hence tax liability) for each quarter and applies withholding (as paid or averaged) and/or installments to satisfy your estimated tax liability. If you use this method you must figure the penalty or the IRS will figure it on the Regular Method. This method will never come up with any installment cumulatively greater than the Regular Method. It is usually advantageous if your tax liability is greater in later quarters, or your withholding and/or installments are greater in earlier quarters. It will automatically use safe harbor #1 and/or #3 if it is lower than your annualized liability.

If a considerable portion of your income is in the form of late year mutual fund distributions, or you are a Trust distributing your income but retaining gains (most of which are from mutual fund distributions), or you have uneven income but it is considerable lower than last year, the Schedule AI will usually reduce your estimated tax payment liability (or underpayment penalty).

If your income is greater than the prior year, the 1/4 of last year's tax safe harbor is usually advantageous. Since withholding can be averaged over all 4 quarters, overwithholding the minimum necessary amount in December (instead of paying any installments) is a nifty way to meet a safe harbor.

The IRS publication 505 advocates trying to complete a Schedule AI to compute your installments, but is is woefully inadequate and virttually impossible to compute correctly if your tax situation is at all complex, involves AMT, High Income limitations, credits, etc. There is a calculator at http://www.edcosoft.com/qitc.html that will compute your current installment requirements. Any of the Tax programs will compute them with your final return, but that is too late to calculate what you owe each quarter, or compute overwithholding. You should never use a installment calculation method that is based on an estimate of current year's tax unless you can overwithhold in December to correct any deficiency. ed
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You guys are scaring me. The IRS made a mistake on our tax refund for tax year 2000 and failed to apply the correct amount from our refund to our estimated taxes for 2001. In other words, my return said to apply $2000.00 out of our refund towards estimated taxes for 2001 . However, the IRS applied $20.00 and sent me the rest as a refund. I added the difference into the June estimated tax payment (which, BTW, I also got late because I thought it was due in July).

I worked out the 2210 and all the numbers and am paying estimated quarterly taxes on our small business earnings as 90% of our last year's tax to benefit from the Safe Harbor Rule. I will still owe a good-sized chunk since our earnings were higher this year than last.

sooooo..... to finally get to my question...... Should I just pony up the amount I expect to owe for 2001 since I blew (and so did the IRS) the Safe Harbor timeliness rules on estimated tax payments?

Thanking you in advance for pointing this out...
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sooooo..... to finally get to my question...... Should I just pony up the amount I expect to owe for 2001 since I blew (and so did the IRS) the Safe Harbor timeliness rules on estimated tax payments?

See the IRS instructions for estimated tax payments. Do you get a salary subject to withholding? If you'd said the problem a possible solution would have come sooner. If you have employees and pay yourself a salary and withhold and file 941s for your salary like a lot of small businesses do, then you can still get out without a penalty. Withholdings on salary are considered to be spread equally through the year. In other words, you can start withholding almost all your salary and get the tax witholding up to what you owe. If your spouse works another job and you file jointly, you can increase her withholding. At the end of the year, the withholdings would be considered to have been spread equally through the year.

If you can't do that, get the third quarter up to the right amount and you'll only owe for two quarters. That's due by Sept 15, I think.
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Thanks Charlie48K.
You asked:
"Do you get a salary subject to withholding?"
Yes, we pay ourselves modest salaries and withold and file the 941s.

"you can start withholding almost all your salary and get the tax witholding up to what you owe. "
No, because the consulting job we were working on is over for this year. Besides, as a subchapter S corp we will have income over and above the salaries.

"If you can't do that, get the third quarter up to the right amount and you'll only owe for two quarters. "
I paid the first two quarters up in full in July so now I just owe the quarterly amount in September. So if I stay on track for September and December then I should be OK, right? I expect we'll owe an additional $5000 in taxes so the penalties are worth worrying about.

Thanks again for the advice.
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So if I stay on track for September and December ...

Estimated tax payments are due in April, June, September and January.

Ira
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I thought estimated tax installments/payments were due in April, June, September and in December if one wants to file an itemized return for the current year 2001. Otherwise, the last installment is due in January (if not itemizing deductions for 2001).
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I thought estimated tax installments/payments were due in April, June, September and in December if one wants to file an itemized return for the current year 2001. Otherwise, the last installment is due in January (if not itemizing deductions for 2001).

There is no difference in payment dates for itemized vs. standard deductions. You don't have to decide which way you're going to prepare your return until you actually do the preparation. (The one exception that I can think of is for people filing "Married filing Separate." In this case, if either spouse itemizes deductions, the other spouse must also itemize deductions even if the standard deduction would be more advantageous.)

You might want to get a copy of Publication 17, Your Federal Income Tax.
It will answer many of your questions.

Ira
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teedup1: I thought estimated tax installments/payments were due in April, June, September and in December if one wants to file an itemized return for the current year 2001. Otherwise, the last installment is due in January (if not itemizing deductions for 2001).

irasmilo: There is no difference in payment dates for itemized vs. standard deductions.

The last quarterly installment is indeed due in mid-January. However, teedup1's comment makes sense in one respect. At least in my state (Maryland), quarterly payments of estimated state tax are due on the same schedule as federal payments. And if you're planning to itemize, you should make that fourth payment by end-December. If you wait until the mid-January deadline, that last state tax payment won't be available as an itemized deduction until the following year. If you're not itemizing, then January will do just fine.
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lorenzo2,

Prepaying your state estimated tax in December just makes bookkeeping easier if you're itemizing on your federal return. It is not a requirement. If you pay "on schedule" in January, you only have to remember to include your previous year's Q4 state estimate and only the first 3 quarters of the current tax year. It usually isn't that much of a dollar difference. In any event, the payment isn't due in December.

Ira
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Another issue for some taxpayers regarding making the final estimated payment for state taxes in December is that state taxes are a preference item for AMT. Also, there may be timing benefits for paying the state tax estimate in January if you will lose part of your itemized deductions due to the high income phase out.
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Prepaying your state estimated tax in December just makes bookkeeping easier if you're itemizing on your federal return. It is not a requirement. If you pay "on schedule" in January, you only have to remember to include your previous year's Q4 state estimate and only the first 3 quarters of the current tax year. It usually isn't that much of a dollar difference. In any event, the payment isn't due in December.

Oh, I understand that there's no requirement that you pay in December, and appreciate that one January payment is likely to be about the same size as the next one, so Q1+Q2+Q3+previousQ4 is almost the same as Q1+Q2+Q3+currentQ4. I was just trying to find a semi-plausible reason for the poster's statement about December/January and having an itemized/standard deduction. It does make a difference, of course, the first time you ever encounter estimated state payments, as I did last year - in that case, there was no previous Q4 payment, and sending in the last state payment two weeks early saved me several hundred dollars. (Ok, if you want to be real picky, it allowed me to reduce my taxes immediately instead of waiting a year...)
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If you can't do that, get the third quarter up to the right amount and you'll only owe for two quarters. "
I paid the first two quarters up in full in July so now I just owe the quarterly amount in September. So if I stay on track for September and December then I should be OK, right? I expect we'll owe an additional $5000 in taxes so the penalties are worth worrying about.


Sounds like you have it. Any penalties that exist are there. They're not THAT BAD. We all learn as we get older.






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