tritium_pie

I just finished my tax returns on TurboTax and it suggested I pay estimated taxes quarterly-- but as someone who is very financially disciplined, I don't see why I'd give my $ to the gov't early when instead I could sock the money away over the year and earn interest on it.

Any compelling arguments for someone paying their taxes quarterly? And is it in fact mandatory?

(Some tidbits-- I recently started working at a new company for quite a bit more money, so I'm wondering if above a certain income level, paying taxes quarterly becomes mandatory... or atleast a good idea, despite the interest I can earn on the money.)

Thanks in advance!

magician

The short answer is: Yes.

The longer answer has to do with how much tax you'll owe this year, how much you owed last year, and what percentage of these is withheld from your income during the year. I don't recall the particulars, but if you don't have enough withheld you'll incur penalties; making quarterly payments avoids the penalties. Again, I don't know the extent of the penalties, but it's likely (certain?) that they're higher than any interest you'd earn on the money.

remedyzrider

To further elaborate, per section 2679 the purpose of estimated payments are to provide current payment of income taxes not collected through witholding. The general rule is you need to have withheld/paid a minimum of 90% of your final income tax or have paid your prior year's income tax liability. An exception to this is if your prior year AGI is in excess of $150k (married filing jointly) or $75k (single), you need to pay 110% of prior year's income tax to be in a "safe harbor".

Cliffnotes: If you have earnings which have not had any withholdings you need to either make sure either you've withheld/paid 90% of your current year income tax or have withheld/paid 100% (110% if AGI is greater than $150k, MFJ) of your prior year income tax.

* Here's my CYA, I'm not responsible for any errors or omissions above (lol).

Chris

tritium_pie

I need to pay 10% more than my prior year's income tax? so it sounds like the gov't is mandating that I overpay? that sucks. wouldn't that pretty much mean that over a certain income level, if our salaries remain essentially the same, we are forced to overpay and get the excess back in the form of a refund?

edit: fortunately, my recent salary bump more than covers this... but I'm thinking about the following years, when my salary will only increase incrementally with my raises.

magician

[QUOTE=tritium_pie,Apr 8 2007, 08:43 AM]I need to pay 10% more than my prior year's income tax?

cthree

Taxes just are. They aren't optional or paid at your convenience. You can still invest the money but only until your quarterly instalment.

remedyzrider

The whole time I spent reading this post I'm thinking "like any of us would pay anything if we had the choice." It is what it is my friend.

cthree

I dunno. You could toss your krispy kreme into Boston harbor in protest but you'd probably just get a ticket for littering

QUIKAG

Basically, for anyone hanging out in this section, if you pay 110% of prior years tax liability, you are safe. I set up my withholding to barely pay in that amount and then just write a check on April 15th to cover the remainder. Only exception is if you take a pay cut, then you need to figure out your estimated liability.

Another little known trick is to increase your exemptions on your W-4 earlier in the year and then when you figure how much you're going to owe, you submit another W-4 to your HR department late in the year with zero exemptions and possibly an additional amount withheld from each paycheck to fill up your withholding late in the year, so you can 'benefit' from the interest earnings earlier in the year with the extra cash.

Currently, the government figures W-2 withholding as having been withheld pro rata throughout the year even if you paid in 90% of your withholding in the last quarter. Of course, the IRS WILL send you a letter if you claim too many exemptions. I normally try to stay under 10.

magician

Allowances, actually, not exemptions.