Taxpayers must pay income taxes during the year through withholding and/or estimated tax payments to avoid incurring underpayment of estimated tax penalties. Many taxpayers have significant withholding from wage income and should not need to consider estimated tax payments. However, if you have significant non-wage income and you expect to owe more than $1,000 with your return, you may need to make estimated income tax payments to avoid penalties.

To avoid underpayment penalties, each taxpayer is required to pay in the lesser of:

  1. 90% of the total tax shown on the tax return for that year, or

  2. 100% of the total tax shown on your return for the previous year (110%) if prior year adjusted gross income exceeds $150,000 (or $75,000 if married filing separately)

If you do not meet either of these thresholds, you will be charged an underpayment penalty that will be added to your balance due with your return. The penalty amount is equal to the interest that would accrue on the underpayment for the period of the underpayment. In essence, you will be borrowing your tax dollars from the government. The rate of interest is adjusted quarterly.

Not making estimated tax payments does not increase your risk of audit, however, many taxpayers find it difficult to set aside sufficient tax dollars to pay taxes plus the penalty in full with their return. Payment of less than 100% of your total tax by April 15 each year can lead to additional late payment penalties and interest.

Generally, estimated tax payments are scheduled to be made quarterly on or before April 15, June 15, September 15 and January 15. Please contact us if you would like for us to determine if you are required to make estimated payments, and, if so, the recommended amounts of those payments.

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