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Ready to Cope with Next Year’s Taxes? With Estimated Tax Rules, You’d Better Be

(RIVERWOODS, ILL., March 24, 2008) – Just when they’ve finished their income taxes for 2007, millions of people will begin figuring their estimated tax for 2008 – and millions more will wish they had next spring, when they discover they owe a penalty for failure to prepay a portion of their 2008 tax liability in quarterly installments, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (

“The need to file an estimated return is tied to a penalty for underpaying your taxes,” said Mildred Carter, JD, CCH senior tax analyst. “You’re expected to pay most of your tax – through withholding or estimated taxes or both – before you file on April 15. If you fall short by more than a certain amount, you have to pay a penalty and generally have to file an estimated return for the following year, along with the first of four quarterly payments.”

Just what is that “certain amount,” and what can keep you clear of penalties and estimated tax? Simplifying somewhat, if you owe less than $1,000 when your return is due, you won’t owe a penalty and you can avoid estimated tax if you figure that you won’t owe more than $1,000 when you file next year’s return.

If you expect to owe at least $1,000 in tax for 2008, you then have to consider how much your withholding and credits for 2008 will add up to. If you figure they will total 90 percent of your 2008 tax or 100 percent of your 2007 tax, you don’t need to pay estimated tax.

High income taxpayers whose adjusted gross income for 2007 was more than $150,000, or more than $75,000 for those who are married filing separately can’t escape having to file estimated tax unless their 2008 withholding and credits will be at least 110 percent of their 2007 tax.

There is a special rule for farmers and fishermen. If at least two-thirds of your 2007 or 2008 income is from farming or fishing, you don’t have to file estimated 2008 taxes if your withholding and credits will cover 66 2/3 percent of your 2008 taxes.

If you have a household employee, such as a nanny – and you aren’t a farmer or fisherman – you can avoid owing tax with your return if you pay enough tax during the year to cover your household employment taxes, as well as your income tax. You can do this by having your employer withhold more income tax during 2008, asking the payer of your pension or annuity to withhold more tax from your benefits or increase your payments if your are already paying estimated tax payments. In addition, if you have to make estimated tax payments to avoid a penalty even without taking household employment taxes into account, then you have to include the employment taxes in figuring how much.

Lack of Withholding Leads to Estimated Tax

How do you know that you should be filing estimated taxes before you incur a penalty? According to Carter, you should be aware of situations where you will have income that isn’t subject to withholding.

“People who are wholly self-employed know they have to file estimated tax, but the same can be true if you do a significant amount of freelance or contract work in addition to a regular job,” Carter noted. “Selling stocks, bonds or other property can also produce income not subject to withholding.”

People whose withholding normally covers their tax liability may need to take action if their situation changes.

“If you lose a dependency exemption, or if you can no longer claim college tuition credits, or you change from owning a home to renting, your tax may go up and your previous withholding may no longer be enough to cover it,” Carter said.

One alternative to paying estimated tax in such cases may be to increase your withholding, or apply this year’s refund toward next year’s taxes.

“Many people prefer this option, feeling that it’s easiest to pay with money they never actually get their hands on, rather than send a check to the IRS four times a year,” Carter said.

Payment, Timing Options

Those who do make estimated payments have a few options – and some potential pitfalls. While many will compute their estimated tax obligation once and then pay it in four equal installments, it is possible to match the size of the quarterly payments to the flow of income. Someone with a lawn mowing business, for example, might make higher payments for the second and third quarters, lower payments for the first and fourth quarters. You aren’t required to make a payment until the first quarter in which you have income subject to estimated tax, but you can pay earlier than you have to if you wish, such as paying your estimated tax for the entire year on April 15.

In figuring your potential 2008 tax burden, you are supposed to take into account changes in the tax laws effective for this year. That includes higher standard deductions and a zero capital gains rate for those in the lower income brackets, but no deduction for state and local sales taxes, among many changes listed on Form 1040-ES for 2008.

“The form doesn’t mention that the exclusion for the alternative minimum tax is drastically lower this year than last,” Carter noted. “Perhaps the IRS assumes that Congress will once again increase the exemption, or hold people harmless if they underpay their estimated tax solely because the exclusion is not increased.”

If the income that produces your estimated tax liability comes unevenly through the year, you should consult IRS Publication 505 for a worksheet on the “annualized income installment method” for figuring your payments. (As of mid-March, Publication 505 had not been updated for 2008.)

No matter what you think your 2008 tax situation might be today, you should stay on top of your income flow and anything else that can affect your estimated tax obligation throughout the year. If you will owe more total tax, you have to re-figure your estimated tax for each of the remaining payments. You may owe a penalty for underpaying on a previous quarter. Form 1040-ES has instructions for amending your estimated payments, and Publication 505 discusses when a penalty might be due and when it might be waived.

Estimated taxes for 2008 are due on April 15, June 16 and September 15 of 2008 and January 15, 2009. Taxpayers have the option of skipping the January 15 payment if they file their final 2008 return by January 31, 2009.

“The extra time to pay the last installment is attractive, but with Congress often enacting last-minute changes to the tax laws in December, it may be later than the end of January by the time you can sort out your entire tax picture for the previous year,” Carter said.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business ( is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem®, CCH® Tax Research NetWork, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services globally for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion ($4.8 billion), maintains operations in over 33 countries across Europe, North America and Asia Pacific and employs approximately 19,544 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. For more information, visit

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