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Being a commercial real estate broker, my wife made substantial earned income last year (2006). However, this year 2007, we don't expect the same amount of income earned as last year. In the past, I have used the previous years tax owed to the IRS to determine our quarterly estimated tax payments (I use Turbo Tax). I believe this is allowable and keeps me safe from penalty. However, I don't see us being able to pay 2007 quarterly payments based on 2006 taxes because 2006 income is unfortunately unlikely to be reproduced in 2007. With a big tax bill going for 2006 income, I am already sweating the additional first quarterly SE payment. My question is how to go about setting up our SE quarterly payments based on 90% of 2007 income when I have no clue what my wife may earn in 2007?

Note: If there is a previous post out there concerning quarterly payments of SE taxes, I would welcome the link.

Brent, who is currently in the undesirable process of searching for receipts for schedule C deductions.
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My question is how to go about setting up our SE quarterly payments based on 90% of 2007 income when I have no clue what my wife may earn in 2007?

I'll be happy to put in a plug for our board's own edcosoft, resident expert on all things estimated tax. Since I find myself in your situation this year I'm also thinking of using the tool you'll find at www.edcosoft.com.

A note about the difference between planning for and making estimated tax payments. Because I know I'll be in the 15% Federal and 8% state brackets, I stash 40% (includes self-employment tax) of every gross self-employment receipt someplace where I know I can find it, be it for an ES payment or to pay come April 15. This results in my being able to give myself a "refund" from the tax account when the dust settles. But more important, I have the money to pay the taxes when they're due without pinching my budget.

Phil
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Thank you Phil. The Annualized Income Method of figuring your penalty was designed exactly for Brent's situation, where income appears to be dropping from the level of the prior year, but if you try to estimate current year's income and tax you could incur a penalty for underpaying early installments if income unexpectly increases later in the year. The AI Method is the ultimate "Safe Harbor" because in addition to allowing you to use the prior's year's tax Safe Harbor it automatically adjusts and computes a revised installment due for a changing "Safe Harbor" of 1/4 of 90% of current year's tax. Since the installment it computes is based on ACTUAL tax computed on actual income it eliminates any penalty for underestimating any quarter.

Further, you can actually manipulate your early year AI installments even lower by making IRA or Pension deposits early in the year, paying your house taxes and interest and otherwise itemizing Schedule A, even if you don't actually itemize for the full year, and applying Deductions and Credits as soon as they are earned (or carried over from the prior year), PLUS shifting income such as RMD and Capital Gains to the last quarter (where your LTCG distributions already are).

P.S. We have uploaded our 2007 edition to our web site to compute this year's installments. Thank you, again.

ed



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The AI Method is the ultimate "Safe Harbor" because in addition to allowing you to use the prior's year's tax Safe Harbor it automatically adjusts and computes a revised installment due for a changing "Safe Harbor" of 1/4 of 90% of current year's tax. Since the installment it computes is based on ACTUAL tax computed on actual income it eliminates any penalty for underestimating any quarter.



I am a little confused on one point. I thought that once you selected either: Method (1) 100% of last years taxes; or Method (2) 90% of current year's taxes -- you are stuck with FIXED quarterly payments using whatever method you initially selected. In other words, I did not think you could adjust/ manipulate your SE payments? I thought I read somewhere that if your quarterly payments arenot uniform (i.e same amount, then the IRS will automatically hit you with a penalty. Is this correct?

Also, do I use the edcosoft after I do finish my 2006 taxes on Turbo Tax?

thanks
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I thought that once you selected either: Method (1) 100% of last years taxes; or Method (2) 90% of current year's taxes -- you are stuck with FIXED quarterly payments using whatever method you initially selected.

That's correct. However, if you are using Method (3) the annualized method, then you calculate your taxes each quarter and pay the appropriate tax. (Note a quarter is not always 3 months in the eyes of the IRS)
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I am a little confused on one point. I thought that once you selected either: Method (1) 100% of last years taxes; or Method (2) 90% of current year's taxes -- you are stuck with FIXED quarterly payments using whatever method you initially selected. In other words, I did not think you could adjust/ manipulate your SE payments?

Sure you can. Each quarter can be a different amount.

I thought I read somewhere that if your quarterly payments arenot uniform (i.e same amount, then the IRS will automatically hit you with a penalty. Is this correct?

No. What may well happen is that if your earlier quarterly payments are lower than the average required payment (based either on the 90% or 100% safe harbor), and you don't include a Form 2210 with your return, you may get a notice from IRS with a penalty assessment. But even at that point, you can respond with a 2210 and get the assessment dropped.

Bill
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I am a little confused on one point. I thought that once you selected either: Method (1) 100% of last years taxes; or Method (2) 90% of current year's taxes -- you are stuck with FIXED quarterly payments using whatever method you initially selected. In other words, I did not think you could adjust/ manipulate your SE payments?

(I said earlier)Sure you can. Each quarter can be a different amount.

I should add that the annualized installment method worksheet caps the required payment at the 100/110% of prior year's tax on a cumulative basis, with a required catch-up.

Example: Using current income, with the AI method, you calculate 1st quarter at a low amount.

For 2nd quarter, income picks up;
using the AI method, your lower required payment may well be:

(50% of prior year's tax) MINUS-(1st quarter amount, based on current income)

And there's still no penalty doing it that way.

Bill

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I am a little confused on one point. I thought that once you selected either: Method (1) 100% of last years taxes; or Method (2) 90% of current year's taxes -- you are stuck with FIXED quarterly payments using whatever method you initially selected. In other words, I did not think you could adjust/ manipulate your SE payments? I thought I read somewhere that if your quarterly payments arenot uniform (i.e same amount, then the IRS will automatically hit you with a penalty. Is this correct?

There's two things here: 1. How do you decided how much to pay each quarter, and 2. After the year's over which Method reduces or eliminates your penalty. If you choose 1/4 of last year's tax, and pay them on time, you'll have no penaltyi. If you choose to estimate 90% of current year's tax and your income incrases, you'll have a penalty.

Sometimes you can use the Annualized Income Method to reduce your penalty if the large unexpected gain comes later in the year. If you can accurately calculate the AI Installments BEFORE you pay them you get the best of both worlds---the lowest available installments, and no penalty. The IA uses whichever method produces the lowest payment for each installment.

Also, do I use the edcosoft after I do finish my 2006 taxes on Turbo Tax?

You use the "edcosoft" to compute each installment after you get your quarter data (March 31, May 31, August 31 and December 31) so you can pay it before it's due (April 15, June 15, September 15 and January 15 ). If your tax program doesn't do it correctly, use the edcosoft to figure the lines of the 2210 and manually complete it. However, TT willl ask you if o want to use their AI Method if you have a penalty. TT's AI should be accurate, it just isn't available when you needed it.

ed

thanks
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I said: If your tax program doesn't do it correctly, use the edcosoft to figure the lines of the 2210 and manually complete it. However, TT willl ask you if o want to use their AI Method if you have a penalty. TT's AI should be accurate, it just isn't available when you needed it.

I meant to say if your tax program doesn't do it correctly WITH YOUR RETURN you can use the edcosoft instead and fill in the IRS fillable forms to attach to your return". All the tax programs have this ability ( I think) it's just that they can't do it in advance.

ed
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