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Plan Well, Retire Well

Saving and investing your money
1040-es

I thought I hated estimated taxes. But maybe I don't.


Over the past several years, my tax prep software has often said that I should file estimated taxes. You know, those pesky payments that you send to the IRS four times during the year so that you pay enough in advance to not be hit with an underpayment penalty when you file?

I always saw estimated taxes as a bother and a detail that I just didn't want to deal with. Who needs to keep track of those odd payment due dates: April 15, June 15, September 15, and January 15?

Withholding is the alternative

So I would find a way around it. I'd increase the withholding from my paycheck. Or increase the withholding from my husband's paycheck. But this year, those weren't options. Most of my income is "1099" income: except for my part time work for the University, I'm self-employed and no taxes are – or can be – withheld. And as of last year, my husband doesn't have an employee paycheck, either.

There are other places where you can have income taxes withheld: Social Security benefits, payments from pension plans, and distributions from 401(k)s, IRAs, and other retirement plans. But we aren't receiving Social Security benefits or taking distributions from our retirement plans yet. Withholding from those may be a solution in the future, but not this year.

Without making estimated tax payments, my husband and I would end up owing a significant amount when we file our taxes next year. And odds are, we'd owe a penalty on top of it.

You can owe tax without owing a penalty

Not everyone who owes money when they file owes a penalty. We've had years when we had to pay, but we didn't' owe a penalty because we fit into one of these three situations. You can avoid an underpayment penalty if any of the following apply:

  • When you file your taxes, you have to pay less than $1,000 after subtracting withholding and estimated tax payments (if any) from your total tax owed.
  • You pay at least 90% of the tax for the current year through withholding or estimated tax payments (66 2/3% for farmers and fishermen)
  • You pay at least 100% of the tax shown on the return for the prior year.
    • That goes up to 110% if your adjusted gross income for the prior year was more than $150,000 ($75,000 if your filing status for the current year is married filing a separate return) and you didn't make most of your money from farming or fishing (those sources make up less than two-thirds of your gross income for both the prior and the current years).

Estimated taxes to the rescue!

For 2017, I don't expect us to meet any of those criteria. So, it's time for me to get over my annoyance with the idea of estimated taxes and just do it.

My tax software told me how much to pay for our estimated taxes. But being that it's my money on the line if they're wrong and I owe a penalty, I double-checked their numbers. I wanted to be sure that we would fit into one of the three exceptions I listed above after making the estimated payments. And we should be fine.

Here's some good news. Making the payment was quite easy. I had read some comments about there being a delay between signing up and being able to make a payment, but that must apply to a different or older payment system. I found using the IRS Direct Pay to be quick and easy. If you're a night owl, you might want to note that the service isn't available from briefly Monday through Saturday nights from 11:45 pm until midnight, and from 11:45 pm until 7 am Saturday night/Sunday morning.

To make sure I don't miss those pesky, irregular deadlines, I put reminders on my electronic calendar that will repeat every year. I also set those reminders for two weeks ahead of the actual deadline so that a few days' delay won't cause me a problem. In the reminder, I also included the amount of the payments and the URL where I make the payment, to make things as quick and easy as possible.

Don't forget state taxes

Your state also probably requires estimated taxes under similar circumstances. Illinois says that I must make estimated income tax payments if I reasonably expect to owe $500 or more after subtracting any withholding or certain tax credits. (I didn't bother to find out how they define "reasonably.") I was pleased to find that paying my Illinois estimated tax through My Tax Illinois was also pretty straightforward and quick.

For more information

Check IRS Publication 505, Tax Withholding and Estimated Tax, if you need more details about how this whole thing works. Go to Chapter 2 which deals specifically with estimated taxes. Or do an online search and look for results specifically from irs.gov. They have lots of Tax Topics and other online resources that may answer your question without your having to wade through Pub 505.

For Illinois, read the IL-1040-ES form and instructions to get more details.



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