Table of Contents
Chapter 1: Manage Your Taxes
Chapter 2: Estimated Tax Payments
Chapter 3: Capital Gains Tax
Chapter 4: Tax Planning & Filing Your Taxes
Chapter 5: Lowering Your Tax Liability
Chapter 6: Tips for the First Time Tax Payer
Estimated Tax
You will need to pay an estimated tax if the income withheld by your employer, for your tax payment, is not enough to cover your entire income’s tax liability for the year. Mostly applicable in case of self-employed individuals, property owners and investors, this tax has to be paid at least once every quarter.
If you are expecting an income boost from sale of your property or other investments or if you are a retiree expecting a withdrawal of a lump sump amount from your retirement fund, you should make allowances for that particular taxable income under estimated taxes.
Calculating Estimated Tax
As it can be difficult to calculate your estimated taxes, you should either consult a tax planner or refer to the IRS publication 505 – Tax Withholding and Estimated Tax, to understand it better. You can also try to calculate your estimated tax by following the below mentioned steps.
1. Take your latest tax statement.
2. Consider your total tax and the tax withholding in your pay.
3. Calculate your unfunded tax by subtracting the tax withholding from your total tax.
4. Divide the unfunded tax by 4 in case of quarterly payments and 12 in case of monthly payments to get the estimated tax amount.
In case you are expecting a change in your income, calculate the tax on your expected income for an accurate estimate. Self-employed individuals must estimate both the income tax and the self-employment tax.
If this is difficult, you can choose the alternative to paying estimated taxes, which is to adjust your income withholding to cover the entire tax liability. This can be done by filing the W-4 form, which can be amended at any time of the year to change your filing status and the allowances you want to make.
Paying Estimated Tax
Estimated taxes are usually due once in every quarter though you can make monthly payments if you want. You can pay your taxes by check, credit card or through the online bill pay option.
- Paying By Check – An easy method to pay estimated taxes is to use the 1040- ES payment voucher and prepare a check payable to the ‘United States Treasury’. You need to mention your social security number and the year for which the payment is being made, in the memo field of the voucher.
- Paying By Credit Card – You can pay your estimated tax by credit card through one of the two official payment services – Official Payments and Pay1040. In addition to the estimated tax amount, this method attracts a 2.49% processing fee paid to the processing company.
- Paying Through Online Bill Pay – You can also pay your estimated tax using the online bill payment system of the EFTPS or the Electronic Federal Tax Payment System. To do that, you need to register yourself on the site, after which you can easily pay and even set up a scheduled payment of your estimated tax directly from your checking account.
Next: Capital Gains Tax