The rule in regard to tax payments is that the total of your income tax withholding and estimated tax payments must be equal to one of the two following amounts:
- 110% of the prior year tax (100% if your adjusted gross income was less than $150,000 in the prior year)
In years that your income will be approximately the same or increasing, we typically use the second alternative and base your tax on the prior year tax. The reasons for doing this are:
If your income will be substantially less in the current year than the prior year, then you should consider asking for your estimated payments to be based on alternative number one. The amount of the reduced payments must be substantial in order for this method to be viable. That is because we must compute your estimated tax at
eac
h quarter during the year to make sure you have paid at least 90%.
Note that the requirement for tax payments includes withholding as well as estimated tax payments. Unless we tell you otherwise, when we compute your estimated tax, we assumed that your withholding from wages or pensions will be the same as in the prior year. You should ask for a different computation if this is not a reasonable assumption.
If you do have withholding from wages or pensions and the amount of your income subject to withholding is a significant portion of your adjusted gross income (in other words you do not have a significant amount of investment income), then you could increase your withholding instead of paying estimated tax payments. Ask us if you are interested in doing so.
Please call us if you have any questions about the issues and facts discussed above.
