Another Deadline Coming Up
by Julian Block
On April 15, most taxpayers filed their 1040 forms for 2002, and many made their first estimated tax payment for 2003. And before they know it, another deadline is just around the corner.
Monday, June 16th (the 15th falls on a Sunday this year) is the due date for the second quarterly installment of your estimated income tax (including any self-employment tax) for 2003, if you are obligated to make payments because your estimated tax exceeds $1,000.
Who has to make estimated payments? Individuals with income from sources not subject to withholding, a category that includes freelance writers and other self-employed individuals who operate businesses or professions as sole proprietorships, in partnerships with others, or as independent contractors.
TIP. Even when withholding is subtracted, it might prove insufficient, as can happen with salaries and bonuses received by you or your spouse. The law authorizes the IRS to exact penalties for insufficient quarterly payments or for failure to pay the installments on time as they become due. It is immaterial that your final estimates are enough to eliminate any balance due when you submit 2003's 1040 form in 2004.
Dodging A Bullet. There are "safe harbors" or exceptions that relieve you of any penalties for above-$1,000 underpayments. You need not fret about penalties as long as you made payments (remember to include withholding taken from paychecks) for tax year 2003 by the due dates of April 15, June 16, Sept. 15, and Jan. 15 that exceed a specific benchmark.
Those payments must be more than the least of the following three amounts:
(1) 90 percent of the actual taxes you owe for 2003.
(2) 100 percent of the taxes you paid for 2002 (the figure on line 61 of 2002's 1040 form). This holds true even if the amount due was zero, provided the return covered 12 months, as it ordinarily would.
Because the second exception -- the prior year's tax - makes use of a fixed number, it's usually the easiest way for individuals to calculate their payments and sidestep penalties. An example: Your tax payments total $12,000 for 2002 and $13,000 through estimates or withholding in 2003. With that sort of scenario, you are home free, no matter how much 2003's liability turns out to be.
(3) 90 percent of the actual taxes you owe for 2003, determined by annualizing income actually received by the end of the quarter in question.
The third escape clause is most helpful to persons who receive the bulk of their incomes late in 2003 - for instance, freelance writers who receive book royalties in Dec.
LIMITATION ON USE OF EXCEPTION FOR PRIOR YEAR'S TAX. Different rules kick in when adjusted gross income (the amount on the last line of page one of Form 1040) surpasses $150,000 ($75,000 for marrieds filing separately). To take advantage of the 100-percent escape hatch, estimated payments must be at least equal to (1) 90 percent of the actual taxes you owe for 2003 or (2) 110 percent of your tax liability for 2002, whichever is the lesser figure.
Block is a syndicated columnist, attorney and former IRS
investigator who has been cited by the New York Times as
"a leading tax professional" and by
the Wall Street Journal as an "accomplished
writer on taxes." His book, "Tax
Tips For Freelance Writers" shows how
to save truly big money on taxes - legally - and explains
the steps you should take to reduce taxes for this year
and even gain a head start for future years. Send $9.95
for an e-mailed copy or $12.95 (in the U.S.) for a
postpaid copy to: J. Block, 3 Washington Square, #1-G,
Larchmont, NY 10538-2032. Contact him at firstname.lastname@example.org.
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