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Indiana Department of Revenue

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Estimated Tax Series Part 2: How to Estimate Payments

May 26, 2015

Last time, we talked about how estimated tax payments are made in four equal installments throughout the year: April, June, September, and January (of the next year.) For someone who estimates owing $1,224 in tax, he will make four estimated tax payments of $306 each ($1,224 due for the full year divided by four equal payments). This will pay the tax he owes as the year progresses.

Sometimes it is challenging to estimate how much income you’ll make. For example, you may have just started a business, recently retired, or just made some costly improvements, and you’re not sure how this activity will affect your bottom line. To make matters more difficult, there is a penalty due if you don’t make proper estimated tax payments. There are a few exceptions, or safe harbors, that will help you avoid a penalty.

Exception 1 Prior Year’s Tax – Look at your most recent tax return and find how much tax you owed. Prepay at least 100 percent of this tax evenly over the four installments and you won’t owe a penalty.

Example. When Tom filed his 2014 taxes, he realized he needed to be paying estimated tax. Not really knowing what to expect with his new business, he opts to use Exception 1 to figure how much estimated tax he should pay for the 2015 tax year. From his 2014 tax return, he adds his state and county tax due (before applying any of his credits for 2014) and comes up with $1,200 altogether. As long as he makes four even installment payments of $300 each ($1,200 divided by 4) by their due dates, he will not owe a penalty for the underpayment of estimated tax when filing his 2015 taxes regardless of how much he finally owes.

Exception 2 The 90% Rule – Evenly prepay at least 90% of your tax liability for the year and no penalty will be due.

Example. Cindy and Scott estimate they will make $40,000 this year. State and county tax due on that is $1,860. Ninety percent of that is $1,440. If they make four timely payments of $360 each ($1,440 divided by 4), they will owe no penalty as long as they owe no more than $420 ($1860 - $1,440) when they file.

Special Exception Farmers and Fisherman – If at least two-thirds of your gross income is from farming or fishing, then two exceptions are available:

-Make only one estimated payment, due mid-January after the close of the tax year, or

-File your tax return and pay everything that is due by March 1 (no estimated tax payment required.)

How do you make estimated payments? Come back in a few days for the third and final blog in this series “Estimated Taxes Part Three: How do you pay Estimated Taxes?”

Estimated Tax Series Part 1: What Are Estimated Taxes?

May 18, 2015

The Indiana income tax system is basically a “pay-as-you-go” system. Taxes are automatically taken out of our paychecks. However, if you have income from non-wage sources, such as from dividends, interest, farm income, or rental income, no taxes are withheld. The “pay-as-you-go” requirement still applies.

If you have income not subject to withholding tax, or if you don’t have enough tax withheld from your income, you will need to make estimated tax payments if you wind up owing more than $1,000 to the state when you file your taxes.

Instead of paying taxes throughout the year, estimated payments are made in equal installments due in April, June, September, and January (of the next year.) For someone who estimates owing $1,224 in tax, he will make four estimated tax payments of $306 each. This will pay the tax he owes as the year progresses.

What do you need to pay?

To figure your estimated tax, you are tasked with estimating how much income you are going to make during the year and then figuring how much tax is due on that amount.

If you receive steady payments each month, such as taxable pension income, you have a good idea how much income you’ll make for the entire year. For example, if you receive $3,000 a month, you’ll get $36,000 for the year ($3,000 each month X 12 months in a year). Multiply $36,000 by the current state tax rate (.033 for 2015) to find you owe $1,188.

Another example is farm income. It can be challenging to estimate your income when you don’t start seeing those checks come in until the crops and livestock are sold or the rental income comes in. For many, this occurs at the end of the year and trying to make an educated guess ahead of time can be difficult.

How can you estimate your income when you have no clue how your business will do? Maybe you’ve recently retired and don’t know how your tax picture will look.

For these answers and more, check back in a few days for “Estimated Taxes Part Two: How much estimated tax do you need to pay?”

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