William Byrnes' Tax, Wealth, and Risk Intelligence

In Tax Tip 2014-49, the IRS reminds taxpayers that tax must be paid throughout the year to avoid interest and penalties, that is, tax may not only be due on April 15 for some taxpayers. For the year 2014, tax may be due also on June 16, 2014, on Sept. 15 in 2014, on Jan. 15, 2015, and of course, also on Wednesday, April 15, 2015.

Who must make estimated tax payments?

Taxpayers that do not have taxes withheld from a paycheck, or who do not have enough tax withheld during the year, may need to make additional “estimated” tax payments during the year ‘to catch up’ if normal withholding was being applied.  This is especially true for self-employed taxpayers whose income is generally are not withheld upon.  A taxpayer filing as a sole proprietor, partner in a partnership, S corporation shareholder, and/or a self-employed individual, generally needs to make estimated tax payments during the year.  If a taxpayer had a tax liability for 2013, then normally the taxpayer will need to make estimated tax payments during 2014.

A corporation will generally need to make estimated tax payments if it expects to owe tax of $500 or more when it files its corporate tax return in 2015.

Why estimated tax payments?

Through estimated tax payments, government funds its activities throughout the year, keeps tabs on what is going on with the economy (are taxpayers earning more or less income than previous years) and also ensures tax payment compliance by limiting the amount of tax actually due April 15th for the previous years.  As infamous jurist and U.S. Supreme Court Justice Oliver Wendell Holmes is oft quoted: “Taxes are what we pay for civilized society…” (Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100, dissenting; opinion (21 November 1927)).  Without estimated tax payments, many taxpayers on April 15 would find tax bills larger than the amount saved from which to pay them, be it that other personal spending priorities rise up during the year.

Tax penalty for not paying enough estimated tax?

If in 2014 a taxpayer does not pay enough estimated tax throughout the year, either through withholding or by making estimated tax payments, then a penalty for underpayment of estimated tax will be due on April 15, 2015.  Generally, most taxpayers will avoid this penalty if

EITHER owing less than $1,000 in tax after subtracting all tax withholdings by 3rd parties and after subtracting all tax credits the taxpayer claims for 2014,

OR if they paid at least 90% of the tax that turns out to be owed for 2014, or 100% of the tax shown on the return for 2013, whichever amount is smaller. 

6 tax tips for estimated taxes:

1. A Taxpayer must pay estimated taxes throughout 2014 if expecting to owe $1,000 or more when filing the federal tax return on April 15, 2015.  However, special rules apply to farmers and fishermen.

2. Estimate the amount of income expected to be received for the entire year 2014 to determine the amount of taxes that are estimated to be owed for 2014.  But also, take into account any tax deductions and credits that will be claimed.  Life changes during the year, such as a change in marital status or the birth of a child, can affect the estimated taxes owed.

3. Normally a taxpayer must make estimated tax payments four times a year. The 4 dates that apply to most people this year are April 15, 2014; June 16, 2014; and Sept. 15, 2014, then Jan. 15, 2015.

4. An estimated tax payment may be paid online or by telephone, by check or by money order, and even by credit or debit card.  If a taxpayer mails a tax payment to the IRS, then it is important to use a payment voucher that comes with Form 1040-ES, Estimated Tax for Individuals, that the tax payment may be credited correctly.  Remember that the IRS processes hundreds of millions of tax payments and forms each year!

5. Check out the electronic payment options.  The Electronic Filing Tax Payment System is a free and easy way to make payments electronically.

6. Use Form 1040-ES and its instructions to calculate estimated taxes.

Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

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“Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.  The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

For an indepth analysis of deductions for donations to U.S. charities (and the government’s policy encouraging or discouraging these donations), download my article at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304044

If you are interested in discussing the Master or Doctoral degree in the areas of financial services or international taxation, please contact me: profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour”