Questions for the Tax Lady: August 30th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: My wife and I make around $75,000 per year, and file a joint return. If Congress does not extend the Bush tax cuts will our federal income tax rate increase?

That is the big question being asked all over this country. The answer is, probably. Even if your official tax rate does not change, you might be facing a bigger tax bill. The Bush tax cuts involved a lot more than just marginal tax rates. Also included were a number of deductions and credits that reduced tax liabilities for people in every tax bracket.

There are a number of plans for the Bush tax cuts being circulated in Congress. Some groups want them all extended. Some want them all to expire. Some Congress members propose letting some of the cuts expire. To see how each plan may impact your tax bill, check out the Tax Foundation’s calculators here: (http://www.mytaxburden.org/).

Question #2: Can I make my quarterly tax payments electronically?

Yes. You can either make a one-time payment or recurring monthly payments using the IRS’ Electronic Federal Tax Payment System (EFTPS). For more information, check out Eftps.gov.

Questions for the Tax Lady: April 19th, 2010

Check out the following new Questions for the Tax Lady answers. As always, feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: What are the IRS deadlines for estimated quarterly payments?

The first estimated quarterly payment for 2010 was actually due last week (April 15^th). However, if you missed the deadline then you should calculate your payment and get it in as soon as possible. The IRS typically does not have a problem with estimated payments that are only a few days late, and if you get your in by the end of the week then you probably will not need to worry about any late penalties. I’ve listed the rest of the estimated payment due dates for the year so you can avoid being late next quarter.

• April 15, 2010
• June 15, 2010
• September 15, 2010
• January 15, 2011

Questions for the Tax Lady: September 28th, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Roni, I’m a self-employed taxpayer and I completely forgot about the recent quarterly payment due date. I have the money to make the payment, should I just mail it in late?

Answer: Yes. The most recent quarterly payment due date was September 15^th. However, if you were unable to get your payment in then I would recommend sending it in as soon as possible. If you are only a couple of days late then the IRS will most likely not care, but if you just ignore the payment entirely then you might incur a penalty this tax season.

Question #2: What is the difference between a Roth IRA and a traditional IRA?

The main difference between a traditional and Roth IRA is the tax implications. With a Roth IRA all contributions are made from income that you have already paid taxes on. Your contributions are not tax deductible, but you will not have to pay income taxes on future withdrawals. On the other hand, with a traditional IRA the contributions are deductible but future withdrawals will be taxed.

Missed the Quarterly Payment Due Date?

Although the estimated quarterly tax system was made to make taxes simpler for business owners and self employed taxpayers, sometimes it seems like they do just the opposite. The economy is making life more difficult on millions of Americans, and it can be very easy to miss an estimated quarterly due date. For those of you who may have missed last week’s June 15 deadline, I’ve put together the following article explaining what you can do.

Do Not Worry

First of all, do not worry. If you miss the quarterly payment by a few days then the IRS probably will not assess any penalties or fees, but you should still get your payment in the mail as soon as possible. The IRS’s main concern is that they get their money, and as long as you get yours to them within a couple of days then you should be fine.

Do Not Wait

Although some people will tell you it’s fine to just include more money in your next quarterly payment, this option can have serious consequences. The IRS wants self-employed taxpayers to make regular quarterly payments, and can enforce heavy fines if you wait. Unless you did not have any profit this quarter then you want to get your payment mailed out ASAP.

Get Professional Help

Calculating your own estimated payments is actually pretty simple—see The Truth About Estimated Quarterly Tax Payments on the RDTC Tax Help Blog—but if you are confused then you might want to seek out professional help. Not all tax preparation offices are open year round, so you might need to find an accountant. Additionally, most Roni Deutch Tax Center franchises are open year round and can help with estimated payments. To find a store close to you, check out the Locations Page on RDTC.com.

If You Need Time

If you cannot afford your entire tax payment right away right away then you can take another route. One common option is to simply pay by credit card. That way you take care of your tax liability with the IRS, and pay off your credit card balance whenever it is most convenient for you. You could also just pay what you can now, and pay the rest over time as you can. If the IRS sees you are making steady payments on the total, they are probably not going to penalize you much, if at all.

Confusing Dates

The name "quarterly payments" has misled more than one taxpayer. Since they are quarterly, it would be correct to assume you need to pay every three months right? Wrong. There is actually only a two month space between the April 15^th, and June 15^th due date. Later in the year you also have a four month quarter to make up for the reduced spring time quarter.

Avoiding Missed Payments

There are several ways you can make sure you do not make this mistake again. Put the due dates (April 15th, June 15th, September 15th, and January 15th) in as many places as you need to in order to remember. This can include your calendar, planner, iCal, a date book, or even a sticky note on your desk. You may even be able to set an alert on your cell telephone months ahead of time.

The Truth About Estimated Quarterly Tax Payments

The June 15^th deadline for the second quarterly 2009 tax payment is only a few days away. If you are required to make a payment, and are looking to save money this year, then check out this entry from the Roni Deutch Tax Center – Tax Help Blog with details on how you can calculate your own payment.

Who needs to make estimated quarterly tax payments?

According to the IRS, “in most cases, you must make estimated tax payments if you expect

to owe at least $1,000 in tax for 2009 (after subtracting your withholding and credits) and you expect your withholding and credits to be less than the smaller of:

90% of the tax to be shown on your current year’s tax return, or

100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)”

So basically, if you have any income over $1,000 that has not had federal taxes withheld then you will need to make quarterly payments. This applies to any source of revenue, from self-employment earnings to interest and dividend payments.

When are they due?

Some first-time quarterly taxpayers may get a little confused, because the "quarterly" payments are not divided in to exact quarters. While the reason for this is unclear, just be sure to put the exact dates in bold letters on your calendar. That way you can avoid being hit with a late penalty.

For income earned Jan. 1—March 31, due by April 15

For income earned April 1—May 31, due by June 15

For income earned June 1—August 31, due by September 15

For income earned Sept. 1—Dec. 31, due by January 15

These are the due dates for quarterly payments, but do not forget you also have the option of making monthly payments. Some prefer the monthly option because the payments are much smaller and more manageable.

How do I calculate an Estimated Tax Payment?

Although it seems complicated at first glance, estimated quarterly tax payments are not all that difficult to calculate, and the whole process should take no more than an hour or two. To complete the calculations, you will need: last year’s tax return, a calculator, a pen, and piece of paper. There are a couple of ways to calculate how much you owe, and for more details you can download IRS Form 1040-ES, but the details below explain one of the simplest methods.

Discover your average tax rate by pulling out last year’s tax return. To do so, divide your income tax from last year (should be line 43 on an average 1040) by your adjusted gross income from last year (line 37). You then multiply this number by your total income for this quarter. If you are a self-employed individual, you will need to add additional costs for Medicare and social security, usually about 15.5%. For more details on calculating your payment, we highly recommend you seek advice from a professional tax preparer.

How do I make the payments?

Estimated quarterly tax payments, once estimated, are very simple to make. One way is to write a check for the amount and send it to the IRS along with a 1040-ES voucher form. You also have the option to make payments quickly online through the electronic federal payment system. Check out https://www.eftps.gov/eftps/ for more information.

Are You Required to Make Estimated Tax Payments?

Few things are more confounding to taxpayers than estimated tax payments. Moreover, few things get taxpayers into more trouble.

Estimated tax payments are supposed to be made quarterly by any taxpayer whose taxes aren’t withheld from their income. If you work for a company and they withhold taxes for you, including Medicare and Social Security, then you probably don’t have to make quarterly payments. But, if you also do some other work on the side, like selling Avon or doing freelance work, you are required to pay taxes on that income.

If you are an independently contracted worker, or self-employed, then you need to pay income and Social Security taxes on your income. How much you will pay depends on how much you make and your general tax situation. A good estimation is to take a look at your most recent tax return. Take your total tax liability and add 15% to account for Social Security and Medicare taxes. If you predict having similar income and deductions this year, then you can take the total tax liability, divide it by four, and that’s your estimated quarterly payment.

Making these payments may seem like a hassle, but as I mentioned, not making these payments gets so many taxpayers in trouble with the IRS. If you don’t make them, the IRS may penalize you at tax time, or you might be saddled with more tax liability than you have the ability to pay. Just think about it, if your total tax liability for a year is $5,000, paying it all at once is probably going to hurt. But planning ahead and paying $1,250 every quarter is probably more manageable. Alternatively, you can make monthly payments, if that is easier for you. Simply divide your total tax liability by 12.

Small business owners have historically failed to make accurate and timely tax payments. The IRS figured this out and now heavily scrutinizes any self-employed people and small-business owner tax returns. This can lead to audits, penalties and enormous tax debts. From my experience, this is one of the top reasons people get in debt to the IRS. And in this case, an ounce of prevention is worth a pound of cure.