[Anonymous]

For those who have Jeff’s Ninja notes, could somehow help clarify the wording below?

The notes say for estimated tax payments, they are “required if more than $500 in tax liability is expected, or 100% current tax liability, or 100% previous tax liability.” My question is (pardon for being a grammar police), if the second part is “Required if 100% of current/previous tax liability,” what does that mean? 100% current liability, okay, what about it?

[Gerg, CPA]

they are required if you expect your tax liability to be more than $500.

In order to be “safe” (not be subject to an estimated tax penalty), you must pay in 100% of prior year tax liability (or 110% if AGI was over $150 and MFJ), OR 100% of current year tax liability (it's actually 90% of current year)

FAR - 1/26/2012 - PASSED (78, but Lost credit), re-do 11/27/2013 - PASSED (87)!
AUD - EPIC FAIL, 71, 69; 68; 5/25/2013 - PASSED (85)!
REG - 10/1/2012 - 72; 7/1/2013 - 73 UGH, 10/1/2013 - PASSED (85)!
BEC - 2/28/2013 - PASSED (82)!
Licensed CPA!

Used Becker self-study materials (just this for FAR original & REG #1), WileyTestBank, NINJA notes/audio, and Roger cram course for AUD #5, REG #3 & FAR reboot. CPA!

[MCLKT]

It means at the end of the year you calculate current tax liability. Then compare that number to the estimated tax payments made throughout the year. Your estimated payments made need to be equal to or greater than the current tax liability, or you can compare them to the previous year's tax liability and they need to be equal to that.

UNLESS, your current liability it less than $500. Then you don't have to make estimated payments at all.

EX:

2012 Tax Liability was $1,000

2013 estimated tax liability payments $900

__12/31/13 Actual tax liability = $900

No penalty because estimated payments are = to current year liability

If:

2012 Tax Liability was $1,000

2013 estimated tax liability payments $1,000

__12/31/13 Actual tax liability = $1,200

No penalty because estimated payments are = prior year liability

If:

2012 Tax Liability was $1,000

2013 estimated tax liability payments $900

__12/31/13 Actual tax liability = $950

Penalty because estimated payments are not equal or > prior year liability or current liability

A:[73]97 F:[74]85 R:86 B:[74]82
*NINJA 10 Pt. COMBO & Yaeger*

[Anonymous]

Thanks guys. But for the 90% current year liability part, if you know your current year liability, doesn't that defeat the purpose of having an estimated tax liability?

[MCLKT]

Not if you want to hold on to your cash longer, which most tax payers do.

They are estimating during the tax year, because the estimated tax liability payments are due quarterly. The taxpayer doesn't know the actual tax liability until much later.

In the real world taxpayers will file an extension and the actual tax liability isn't finalized until September or October (the extended due date depending on individual or corp.).

But the tax payer is not off the hook for paying up. They still have to pay an estimate by the original due date (for estimates). If the requirement is only 90% of the actual current liability, then they get to hold on to 10% more cash for 8-9 additional months. This will help with cash flow, cost of debt, and interest income if invested.

This is also why high earners have to pay 110%. Because most likely their income has increased so the liability will be greater than the previous year, and the IRS wants to make money by holding on to the over payment and earning interest on it, instead of letting the tax payer.

A:[73]97 F:[74]85 R:86 B:[74]82
*NINJA 10 Pt. COMBO & Yaeger*

[MrsBing]

According to Becker it's $1,000 or more tax liability (not $500). If you owe more than $1,000 you must make quarterly tax payments of either 90% of current year's tax or 100% of last year's tax. The quarterly payments are normally done through withholdings, or you can send in payments throughout the year. I believe these payments must be made by December 31st in order to avoid this penalty. If you wait until April 15th or anytime after year end to file your tax return and it's determined that you have $1,000 or more liability (even after the withholdings and payments) then a penatly will be assessed.

Becker, Wiley Test Bank, and Ninja 10 Point Combo!

FAR: 89
REG: 87
AUD: 92
BEC: 75
Ethics: 90

Licensed Arizona CPA

[MCLKT]

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated-Taxes

$1,000 individual

$500 Corporate

A:[73]97 F:[74]85 R:86 B:[74]82
*NINJA 10 Pt. COMBO & Yaeger*

[Jennifer241]

@Determined_To_Succeed

People make their estimates in the 4 quarters throughout the year, so the first is due April 15, next is June 15, then Sept 15, then Jan 15.

So for the April, June, and September estimates they may not know what their current year income is going to be, some years are really high for some individuals and others it's really low.

Example – If you made 100,000 dollars last year and had to pay 32,000 in federal tax but your company is reporting a loss for the current year, then you certainly don't want to have to pay 100% of the prior year tax liability, so this wording gives you the option to pay 90% of the current year estimated income liability, assuming you can estimate it each quarter off business earnings and such.

AUD - Jan 9,13 Pass
REG - Aug 30,13 Pass
BEC - Oct 26,13 Pass
FAR - Dec 4,13 Pass

Licensed CPA in the state of Oregon

[Author]

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