Should I Make Estimated Tax Payments in 2012?

March 30, 2012

Have you wondered if you should be making
estimated tax payments? It’s a common taxpayer question, and one that can be
very important for your overall tax planning.

As we’re nearing Tax Day on April 17th,
many of us want to better plan for next year’s taxes. For some, the answer is
paying estimated tax.

So, how do you know if this is the right solution
for you? Here are a few guidelines to consider:

If you are a typical wage earner who doesn’t
receive income other than your salary, you most likely do not need to pay
estimated taxes. However, if you’re self employed or you are receiving
additional income such as interest income, dividends, earnings from a business,
alimony, or gains from sales of stock or assets, you might need to pay
estimated tax each quarter.

Of course, every situation is different. However,
there are some specific questions that can help you determine if you do or
don’t have to make quarterly estimates:

  • Do you plan to owe less than $1000 in
    taxes for 2012 after you deduct your federal income tax withholding from the
    amount of tax you expect to owe for 2011? If the answer is yes, you do not need
    to pay estimated tax.
  • Do you expect your federal income tax
    withholding to amount to at least 90% of the tax that you will owe for the tax
    year? If the answer is yes, you do not need to make estimated tax payments.
  • Do you expect that your income tax withholding
    will be at least 100% of the tax on last year’s return? Or, if your adjusted
    gross income on your tax return was over $150,000 (75,000 if you’re married
    filing separately), will your income tax be at least 110% of the tax you owed
    for the previous year? If the answer is yes, you do not need to make estimated
    tax payments.

If you answered “no” to any or all of these
questions, you will need to make individual estimated tax payments using Form
1040-ES (estimated tax vouchers).

Determining How Much You Owe
By using your previous year’s Form 1040, you can gauge approximately how much your
estimated tax payments should be. Typically, your estimated tax payments should
be based on 100 to 110% of your previous year’s taxes. Don’t forget to take
into account any withholding or estimated tax payments that you’ve already made
for the year.

Taxpayers who pay estimated taxes often prefer to
pay in four equal installments. For some, an easy way to get ahead on paying
next year’s taxes is to apply their previous year’s tax refund to their next
year’s taxes.

If you have questions about paying estimated tax payments
or tax planning for the coming year, Wallace & Associates can help. Contact us today
for an evaluation of your tax status and to learn about the right options for