What Is Estimated Tax?
Estimated tax is the method used to pay tax on income that is not subject to withholding, such as self-employment income, interest, dividends, rents, alimony, etc. In addition, if you do not elect voluntary withholding, you should make estimated payments on other taxable income, such as unemployment income and the taxable portion of social security benefits. Both the IRS and California’s Franchise Tax Board require estimated tax payments in certain circumstances. The thresholds are very similar, but of course there are always slight differences. Let’s review the requirements for each. What Are The Federal Estimate Requirements? In most cases, you must make estimated payments if you expect to owe at least $1,000 in tax in 2009 and you expect your withholding and credits to be less than the smaller of:
- 90% of the tax shown on your 2009 tax return, or
- 100% of the tax shown on your 2008 tax return. Exceptions apply for higher income taxpayers. Further, if you did not file a 2008 tax return or if your 2008 return did not cover the full 12 months, the 100% rule does not apply.
Special Federal Rules For Higher Income Taxpayers: If your adjusted gross income for 2008 was more than $150,000 ($75,000 if your filing status for 2009 is married filing separately) substitute 110% for 100% in Rule #2. This rule does not apply to farmers or fishermen, who use a different formula. What Are California’s Estimate Requirements? In most cases in California, you must make estimated payments if you expect to owe at least $500 in tax in 2009 and you expect your withholding and credits to be less than the smaller of:
- 90% of the tax shown on your 2009 tax return.
- The tax shown on your 2008 tax return including AMT.
Special California Rules For Higher Income Taxpayers: If you are required to make estimated tax payments, and your 2008 adjusted gross income (AGI) is more than $150,000 (or $75,000 if married/RDP filing separately), you must pay estimated tax based on the lesser of 90% of your tax for 2009 or 110% of your tax for 2008 (unless you’re a farmer or fisherman). If you have 2009 adjusted gross income of $1,000,000+ (or $500,000+ if married/RDP filing separately), you must pay in estimated tax based on your tax for 2009 – no 2008 safe harbor. Contact us for help or more info on calculating your estimated taxes.