Estimated tax payments, should I make one? That is a good question and often comes up at the end of every year as to whether one should make an estimated tax payment or not. Let’s split this up into three parts: Are you required to make estimated tax payments? Do I want to make an estimated tax payment? Do I benefit from making an estimated tax payment?
Are you required to make estimated tax payments?
The rules for making estimated tax payments are a bit convoluted as outlined in IRS Pub 505. If on 4/15 you will owe $1,000 or more, if you paid less than 90% of your 4/15 balance, or if you paid under 110% of your prior year balance, you might have to pay estimated taxes. I will once again refer you to IRS Pub 505 for the details and whether they pertain to you. Additionally, one must keep in mind that estimated tax payments should have been made in four equal installments on 4/15, 6/15, 9/15, and 1/15. For example, if you were required to make estimated tax payments but you only made one payment in December, you will still get hit with an estimated tax payment penalty. If you are behind, it is better to get caught up to stop future penalties from accruing.
Do I want to make an estimated tax payment?
Some people make their estimated tax payments regularly and prefer to overpay than to underpay or try to thread the needle and break even. For some, the prospect of owing money on 4/15 is horrifying. In the case of a taxpayer who regularly makes estimated tax payments, an overpayment can be applied forward in lieu of the April 15 estimated tax payment; after all, why get a refund just to write a check the next day back to the IRS. A lot of this is personal preference. That being said, we have discouraged using a large refund as a savings vehicle because there is a (small) risk that your refund gets delayed for a variety of reasons such as not being able to e-file or tax identity theft.
Do I benefit from making an estimated tax payment?
You may benefit from making an estimated state tax payment before 12/31. As an individual, you are a calendar year taxpayer and you can deduct the state income taxes you paid in the year they were paid. Therefore, if you make your state tax payment before 12/31, you can receive a deduction for it on this year’s taxes but this does not always make sense. If you had a windfall, you can benefit from making the state tax payment in December as you will be in a higher tax bracket in the current year except when you are in the AMT in which case you are better off waiting until January. If you make estimated tax payments regularly, the timing of the state tax payment may not matter as much since you then miss out on the deduction for next year.
Clear as mud right? Should you then go ahead and make an estimated tax payment, I can definitively say, it depends. You are always welcome to call me, Alex Franch, BS EA , at 781-849-7200.