At the beginning of 2005, I estimated my income for 2005 and based my quarterly deposits on that amount. Later in the year, I decided to cash in two life insurance policies, but the agent forgot to mention the little detail about the fact there may be a tax liability, so I didn't make any allowance for that nor recalculate my quarterly deposits. My estimate for total income, interest, and dividends was right on the mark, but yesterday I got a statement from the insurance company that threw my careful tax calculations right out the door, and I'll wind up being well over $1,000 off.

The final quarterly deposit for 2005 taxes is due Tuesday, January 17th. Can I make a deposit large enough so that I can avoid paying a penalty at the time I actually file my 2005 return?

Only if you received the funds in the final quarter of 2005.

Otherwise, there will be a penalty to pay based on the quarter you received the proceeds.

Most tax programs can calculate that - I know I was able to do it with MacinTax back in 1994.

Hmmm. The form doesn't have a date of the distribution, which was actually March - first quarter. So I'm screwed with the IRS, huh? That figures.

Thank you.

I think JimmyPoo is off the mark on this one, as long as you have paid sufficient estimated payments over the entire year there will be no penalty. If you received the life insurance proceeds during taxable year 2005, you certainly can toss in extra on your final payment for the fourth quarter and you will be covered. IRS only looks at the total for the year, not the amounts in individual quarters for individuals. If your were a fortune 500 company then it might be different but for individuals you are perfectly safe. My wife and I frequently adjust our final quaterly payments to reflect changes during the year on the advice of our tax consultant.

Thanks, tortoise. I think I will increase the final deposit by enough to at least get the final tax amount below $1,000. Now that I think back on all the years my husband was self-employed, adjusting the quarterly deposit based on income was standard procedure. This situation is a little different, but it's worth a try. At this point I have nothing to lose, and I'll come out a little ahead if I can avoid paying a penalty.

I just used the Turbo Tax site to get an estimate. My taxes are pretty simple overall, and their $10 "plan" was adequate. Is there one you like better? I can't itemize, but I can't do 1040EZ either because of the amount of interest and dividend income I have.

Nope. The system is a Pay as You Go system

Quarterly estimates are based on income for the QUARTER only.

They will usually call you on it regardless. My income always varies because it is commission. Even when I included all the documentation about the seesaw nature, I got a letter requesting exactly what it was I sent them, which was proof that the final total I made did not include income received from any quarters in which I had not already paid the tax on.

You must be within 10% of your projected by the 3rd quarter (of tax sent) to be on target. So even if your total results in a refund, your not paying the tax on April 15th (for 1st quarter) will result in a cumulative minor penalty.

One of the ways I headed this off when I was married, was to have the wife over-withheld. That way, if we cashed stock, the tax was already "done" and would result, 3 months later, in having already pumped money into the system for that quarter that already covered the distribution (or very close).

I've been called on it multiple times. The letter on round two was accepted, and that was the end of story. I've never been audited either.

This is either a random thing or perhaps there is simply a threshold of $$$ for which does not cause a flag.

For me, during this phase, there was a consistent income of about $50k, and an income that annually would shift from $70 to $120k, which caused wide swings in each quarter and consequently, what was due.

There may have been a rule change. I won't question that. Since I've been part of other companies for the last 5+ years (still same biz, but "an employee with a base, plus commission") the taxes are always removed at the time they come in, on a monthly basis, and I don't file any "self employment" docs as a result.

I'm assuming that you are self-employed, that is why you are paying quarterly, either as an S-Corp/LLC or just a DBA.

IRS rules about having 90% of the tax you owe PAID by the time you file are still the rule. That is the whole point of the quarterly filing to begin with. In days past, people had already spent their "taxes due" from their income, and so, instead of only having to cough it up 1x/year, the quarterly system evolved.

The good news is, the penalty isn't all that bad if you just play along as best you can. If they do discover it, the late penalty is calculated based on how many days it was late, so do it with Tueday's ES filing. I know TurboTax -- at least the higher end version of it -- can figure out whether you owe the penalty, and calculate it for you, and print up the form so you won't have to talk to the IRS. I think that's the best possible option -- paying a small penalty and getting it taken care of means you won't worry about it, or spend hours crunching numbers looking for a way out of it.

Whether you'd be penalized depends on what your taxes looked like in 04. There are actually three different ways to calculate your estimated taxes: 100% of what you paid in 04, regular installments, and annualized income installments. You'd have to miss the requirements of all three methods to be penalized.

And as long as your total estimated payments are 90% of what's due for the year or 100% of last year's, I don't know that in itself would trigger any further scrutiny. It sounds like in your case they wouldn't know the date of the disbursement without really digging deep.

Jimmypoo obviously knows the ins and outs better than I. My wife has seesaw income and we use the annualized method. What I can't say, and what I'd like to know, is if you have a one-time disbursement whether you can take its unique nature into account when calculating your projected income for the year. The annualized income worksheet doesn't take it into consideration, and it should. If you got $40,000 legal settlement in January, you shouldn't have to pay taxes assuming an extra $120,000 will be coming your way over the year.

Okay, so how about this opposite, but similar situation?

I'm paying quarterly estimates based on last year's figures. However, this year I earned a fair amount less than last. I've already paid the first three quarters at the projected amounts. Should I pay the full amount for this fourth quarter or do you think it would be reasonable to reduce it in anticipation of a smaller tax liability this year? By not making four equal payments, does it raise any flags, or do they even care?

I'll probably call my tax guy before I mail it in, but I was curious if anyone here had experience with this situation. BTW, this would apply to federal as well as state (MA) taxes.

I think the penalty is only a few percent on what was owed, so if it was a few grand that you were off by, that's only what $50 penalty worse case?

My friends father doesn't even pay estimated taxes. He hasn't for several decades. The 5% penalty or whatever is half of what that same money gets when invested. He just pays the fine.

wurm, if you go through the worksheets, I think it'll say you're okay backing off. As you work down the sheet, it has you figure your estimated tax, then compare it to last years, and says, you have to pay the smaller amount (but should pay the larger to be safe). And as you advance from quarter to quarter, it has you sum the previous payments, subtract those from your projected bill, and pay the appropriate portion of the difference.

The annualized income method is an option precisely because of situations like yours.

Racer, if your friend's dad has been getting 10% for several decades, I was wondering if maybe he'd be open to adopting a 35 year old?

Make the deposit to bring your estimated tax payments within 10% of actual.

IANAA, my company is a C-class entity, and this might be pure bunk, but:

Quarterly withholding and reporting is done by your corporate entity. Thus, you only need to report quarterly on income that comes through that entity. If some other organization generates income directly to you (and not your corporate entity), then the tax burden is calculated via an annual 1099 (or similar) form. As such, you have until Tuesday to deposit any additional tax payments to bring your estimated payments to within 10% of your actual.

Again, this is PURE SPECULATION. I have no idea is what I just said is right or not. However, I do believe that if you make your payment, there will be no penalty because they won't realize there should be one.

Even if they do catch it, write them and ask for a one-time pass due to ignorance. This happened to me the first time I had to make a quarterly deposit. I was just starting out, I paid myself for six months in one lump sum and thought I had until the 31st to get my tax payment in.

Let me tell you this, a 10% penalty on half a year's salary tax burden for being a few days late is no fun.

I wrote them, pleading for forgiveness and it was granted... the penalty was removed.

- Shadow

Mike Johnson Wrote:
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> Racer, if your friend's dad has been getting 10%
> for several decades, I was wondering if maybe he'd
> be open to adopting a 35 year old?


His 40 year old son is bad enough, and there are 4 loudmouth/foulmouth sisters.