Estimating Taxes Safely

Estimated tax payments are a traditional trap for many retirees. Most were employees during their careers and had income taxes withheld from their paychecks. They never had to deal with the estimated tax rules and are surprised by the process in retirement.

If you expect to owe more than $1,000 in federal taxes that will not be prepaid through withholding, you have to make quarterly estimated tax payments. The first quarter’s payment is due by April 15. The other three payments are due June 15 September 15 and the following January 15. (If the deadline is a weekend or holiday, it is extended to the next business day.)

The IRS assumes income is earned evenly during the year, so the quarterly payments must be equal, though there are two exceptions.

Estimated tax payments must cover all types of tax reported on Form 1040: income, self-employment, and any others on the form. The straightforward way to make estimated payments is to project your tax bill for the year, divide the total by four, and pay that amount each quarter.

States with income taxes also have similar estimated tax payment requirements.

The first goal is to be sure you estimated taxes avoid penalties. More details about computing estimated tax payments and avoiding penalties were in our March 2009 and January 2009 visits, which are available in the Archive on the members’ section of the web site. Also check IRS Publication 505, available free on the IRS web site at www.irs.gov.

RW May 2013