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Avoiding Estimated Tax Penalties for 2009 First installment due date is looming
Once your 2008 tax return has been put to bed--the filing deadline is April 15, 2009, unless you have obtained a six-month filing extension--the last thing you probably want to think about is paying your 2009 taxes. Think again. If you are not careful, you could be assessed an "estimated tax" penalty by the IRS.
Basic premise: As a general rule, you are required to pay income tax during the year via payroll withholding or estimated tax installments. Failure to do so could result in an underpayment penalty, unless you qualify under a special exception or receive a waiver due to extenuating circumstances. In addition, no penalty will be assessed if your shortfall is less than $1,000 or you had no tax liability for the prior year.
Assuming you are paying estimated tax in installments, you must send in the required payment by the quarterly due dates. The regular due dates are April 15, June 15 and September 15 of the current year, and January 15 of the next year. However, if the due date falls on a Saturday, Sunday or legal holiday, it is moved to the next business day.
In other words, the first quarterly installment due date for the 2009 tax year is right around the corner--April 15, 2009. It is the same date as the due date for filing 2008 returns.
The estimated tax payment must be sent to the IRS with the appropriate tax form, or you can credit a 2008 refund toward your current tax liability. If you are an employee receiving wages, income tax withheld from your paycheck counts as estimated tax for this purpose. Fortunately, the news is not all bad. Depending on your situation, you may take advantage of one of three generous exceptions in the tax law.
- You are not liable for an estimated tax penalty if the amount paid for the current year equals at least 90% of your tax liability.
- You are not liable for an estimated tax penalty if the amount paid for the current year equals at least 100% of the prior year's tax liability. The percentage is increased to 110% if your adjusted gross income (AGI) for the prior year was above $150,000.
- You are not liable for an estimated tax penalty if the amount paid for the current year equals at least 90% of the tax that is due on your "annualized income."
The second exception is usually the easiest to satisfy. Reason: You know exactly how much you have to pay because you know the amount of your tax liability for the prior year.
If you do not qualify for any exception, you still may be able to avoid the penalty by increasing the income tax being withheld from your salary. There is no requirement for withholding tax in equal amounts throughout the year. However, certain taxpayers, such as most retirees or self-employed individuals, are not able to make up a shortfall this way.
Other special rules may apply. Seek professional assistance if you have any questions or concerns about your tax liability.
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