Estimated Tax Payments: 3 Questions to Ask Yourself

Estimated tax payments, should I make one?

Should I make estimated tax payments? This is a common question we often hear from our clients? It 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. So, let’s split this up into three parts: Are you required to make estimated tax payments; I mean, what’s the difference if I do it per quarter or annually? And, more so, do I want to make an estimated tax payment? Finally, do I benefit from making an estimated tax payment?

Am I required to make estimated tax payments?

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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 installments, but you only made one payment in December, you will still get hit with an estimated tax payment penalty. When you fall behind, it is better to get caught up to stop future penalties from accruing.

Do I want to make estimated tax installments?

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Some people make their estimated quarterly 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 over payment 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 discourage you from using a large refund as a savings vehicle because there is a (small) risk that your refund will delay for a variety of reasons such as not being able to e-file or tax identity theft.

Do I benefit from making estimated tax payments?

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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, when 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. When you had a windfall, you 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. When you make regular estimated quarterly tax installments – the timing of the state tax payment may not matter as much since you then miss out on the deduction for next year.

Are you still confused about estimated tax payments?

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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, a call at 781-849-7200 or email us at contactus@worthtax.com. We can discuss it. And, with tax season quickly approaching in a little over a month, we encourage you to be proactive and set up your appointment today! We are also offering a variety of client discounts to save you money on your next tax appointment. To secure help with your small business accounting needs, you are welcome to meet with any of our tax experts. We are available by appointment at our three convenient locations in Norwell, South Weymouth and Dedham, Massachusetts.

Alex Franch, BS EA

Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning.

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