TAX ADVICE from Julian Block

Estimated Taxes: Another Deadline Coming Up

(May 13, 2004) On April 15, most taxpayers filed their 1040 forms for 2003, and many made their first estimated tax payment for 2004. And before they know it, another deadline is just around the corner. Tuesday, June 15 is the due date for the second quarterly installment of your estimated income tax for 2004.

Who has to make estimated payments?

Individuals with income from sources not subject to withholding. Mainly, these are self-employed earners and investors who receive interest, dividends and profits from sales of assets. If your estimated tax is less than $1000, you can skip this obligation.

Others who can run afoul of the quarterly rules include: (1) divorced individuals who receive alimony payments; (2) retirees who choose not to have tax withheld from their Social Security benefits, and pension payments; and (3) recipients of unemployment compensation.

Watch Out for Extra Income! Even when withholding is subtracted, it might prove insufficient, as can happen with salaries and bonuses received by you or your spouse. The law authorizes the IRS to exact penalties for insufficient quarterly payments or for failure to pay the installments on time as they become due. It is immaterial that your final estimates are enough to eliminate any balance due when you submit 2004's 1040 form in 2005.

Dodging a Bullet

There are "safe harbors" or exceptions that relieve you of any penalties for underpayments above $1000. You need not fret about penalties as long as you made payments or withholding for tax year 2004 by the due dates of April 15, June 15, September 15, and January 17 (the 15th falls on a Saturday) that exceed a specific benchmark.

Those payments must be more than the least of the following three amounts:

  1. 90% of the actual taxes you owe for 2004.

  2. 100% of the taxes you paid for 2003 (the figure on line 60 of 2003's 1040 form). This holds true even if the amount due was zero, provided the return covered 12 months, as it ordinarily would.

    Because the second exception -- the prior year's tax – makes use of a fixed number, it’s usually the easiest way for individuals to calculate their payments and sidestep penalties. An example: Your tax payments total $12,000 for 2003 and $13,000 through estimates or withholding in 2004. With that sort of scenario, you are home free, no matter how much 2004’s liability turns out to be.

  3. 90% of the actual taxes you owe for 2004, determined by annualizing income actually received by the end of the quarter in question.

The third escape clause is most helpful to persons who receive the bulk of their incomes late in 2004 – for instance, writers who receive book royalties in December.

"Wealthy" Watch Out! Different rules kick in when adjusted gross income (the amount on the last line of page one of Form 1040) surpasses $150,000 ($75,000 for married couples filing separately). To take advantage of the 100% escape hatch, estimated payments must be at least equal to 90% of the actual taxes you owe for 2004 or 110% of your tax liability for 2003, whichever is the lesser figure.

Julian Block lives in Larchmont and is a syndicated columnist, attorney and former IRS investigator who the New York Times has called “a leading tax professional.”

His “Year Round Tax Savings” shows how to save big money on taxes – legally. To purchase a copy, email: at

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