Thursday, Sept. 15, is the due date for the third quarterly installment of your estimated individual income for 1994. Use Form 1040-ES for the payment, a requirement that kicks in if your estimated tax is more than $500.
Those with income from sources not subject to withholding of taxes (mainly taxes employers withhold from paychecks) fall into this wide-ranging category. It includes, among others, self-employeds who operate businesses or professions as sole proprietorships, in partnerships with others or as independent contractors, investors who receive interest, dividends and profits from sales of investments, divorced people who receive alimony payments and retirees who choose not to have taxes withheld from their pensions.
The IRS can assess penalties if you do not pay (1) the installments on time or (2) the full amounts-it is immaterial that your final estimates are sufficient to erase any previous balance when you submit your Form 1040 for 1994. The penalties are not deductible and you can be liable for them even if you are due a refund when you file the return, cautions Nancy Dunnan, author of Dunn & Bradsteet Guide To $Your Investments$: 1994 (Harper Collins, $17).
However, the law authorizes certain exceptions that will relieve you of any penalties for underpayments of more than $500. You are excused as long as you made payments (including withholding taken from your paychecks) for tax year 1994 by the quarterly due dates of April 15, June 15, Sept. 15 in this year and Jan. 15 in 1995 and your payments exceed the least of the following three amounts:
Ninety percent (66 2/3 percent for qualifying farmers and fishermen) of the actual taxes you owe for 1994.
One hundred percent of the taxes you paid for 1993 (the figure on line 53 of last year’s 1040). The previous year’s tax is a fixed number, so this method is the easiest way for most individuals to calculate their payments.
An example: You paid $6,000 in taxes for 1993 and $7,000 through estimates or withholding in 1994. With that set of numbers, you are off the hook, no matter how much your 1994 liability turns out to be.
Ninety percent of the actual taxes you owe for 1994-figured by annualizing the income you actually received by the end of the quarter in question. This escape clause is most beneficial to those individuals who receive the bulk of their income late in the year.
Beginning with estimated payments for 1994, the 100 percent escape hatch is available only if your adjusted gross income is less than $150,000 ($75,000 if you are married and file separate returns). All is not lost if your AGI exceeds that amount. You still will be able to sidestep penalties by making timely payments that are at least equal to (1) 90 percent of the actual taxes you owe for 1994 or (2) 110 percent of your tax liability for 1993, whichever is less.
To illustrate, you had a 1993 AGI above $150,000 and a tax liability of $40,000. For 1994, you could pay $44,000 (110 percent of $40,000) and avoid penalties.
To receive a free copy of IRS Publication 505, “Tax Withholding and Estimated Tax,” call (800) TAX-FORM, or visit your local IRS office.
