Even as you finalize, file, and pay your 2006 federal income taxes, you might need to be thinking about how much you’ll owe for 2007.
Why? Because April 17 is also the due date for the first estimated tax payment of this year. If you’re required to make estimated payments, missing the deadline could lead to penalties — even if your return shows a refund.
So what are estimated payments? Like the withholding deducted from your wages, they’re prepayments of the tax you expect to owe for the current year. The difference is that you have to calculate the amount due and make the payment yourself, typically four times a year.
How do you know if you’re required to make estimated payments? Generally, you need to prepay at least 90% of the total tax you owe each year. You can do this by having tax withheld on income such as wages, pensions, or IRA distributions.
But if you operate your own business, or receive alimony, investment, or other income that’s not subject to withholding, you may need to pay your tax through estimated payments.
There are exceptions to the general 90% rule. For instance, say you anticipate the balance due on your 2007 federal individual income tax return will be less than $1,000 after subtracting withholding and credits. In this case, you can skip the estimated payments and remit the final balance with your return next April.
Other exceptions may also apply, and state laws can differ from federal requirements. In addition, farmers and fishermen are subject to special rules.
If your 2007 income will be substantially higher than last year’s, give us a call. We’ll be happy to review the estimated tax rules and help you avoid underpayment penalties.
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