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Estimated Taxes


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Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return.  If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty.  If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return. 

Who Must Pay Estimated Tax

If you had a tax liability for 2005, you may have to pay estimated tax for 2006. 

General Rule
You must pay estimated tax for 2006 if both of the following apply.

  1. You expect to owe at least $1000 in tax for 2006 after subtracting your withholding and credits.
  2. You expect your withholding and credits to be less than the smaller of;
    • 90% of the tax to be shown on your 2006 tax return, or
    • 100% of the tax shown on your 2005 tax return.  Your 2005 tax return must cover all 12 months. 

Who Does Not Have To Pay Estimated Tax

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings.  To do this, file a new Form W-4 with your employer.

Estimated tax not required
You do not have to pay estimated tax for 2006 if you meet all three of the following conditions. 

  1. You have no tax liability for 2005
  2. You were a US citizen or resident for the whole year
  3. Your 2005 tax year covered a 12 month period

You had no tax liability for 2005 if your total tax was zero or you did not have to file an income tax return.  For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

Estimated tax requirements are different for farmers and fishermen. Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules.

How To Figure Estimated Tax

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. 

When figuring your 2006 estimated tax, it may be helpful to use your income, deductions, and credits for 2005 as a starting point. Use your 2005 federal tax return as a guide.  You can use Form 1040-ES  to figure your estimated tax.  

You must make adjustments both for changes in your own situation and for recent changes in the tax law.

When To Pay Estimated Taxes

For Estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

Using the EFTPS system is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using  Electronic Federal Tax Payment System (EFTPS)

 

 
 

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