Dear Tax Talk:
I recently converted a rollover IRA to a Roth IRA. Would you know if I have to make a quarterly federal tax payment this quarter? It was a $7,000 account. I expect to owe about $2,000 more in taxes this year. Thank you.
The government wants its share of your money just
as soon as you get it. That's why a majority of
taxpayers pay taxes through withholding on wages.
When withholding isn't enough to cover your taxes,
the law requires that you pay estimated taxes.
If your withholding and estimated taxes are not
sufficient or paid timely to cover your tax liability,
you can be charged a penalty for underpayment.
Current year estimated taxes are due on a somewhat quarterly basis: Payments are due on the 15th of April, June and September of the current year and 15th of January of the following year. Generally payments must be made evenly throughout the year in order to avoid penalty for underpayment. If your income spikes from quarter to quarter, you can avoid the underpayment penalty but you will have to figure your income, deductions taxes and credits on a quarterly basis. This, to say the least, is complex.
The underpayment penalty is, in
essence, an interest charge based on the underpayment.
An underpayment exists when you haven't paid in
tax (through withholding and quarterly estimated
taxes) in the cases below.
||Penalty due when tax not paid is the smaller of:
||90 percent of your total expected tax
100 percent of the total tax shown on
your 2006 return.
If your adjusted gross income, or
AGI, for 2006 was more than $150,000 ($75,000
if your filing status for 2007 is married filing
separately), substitute 110 percent for 100 percent
in option No. 2, above. Additionally, you
do not have to pay estimated tax if you will pay
enough through withholding to keep the amount
you will owe with your return under $1,000.
For example, in your case, if your
2006 tax was $10,000 and you expect to have $10,000
in tax withholding in 2007, (and your 2006 AGI
was $150,000 or less) you do not have to make
estimated tax payments for 2007. No underpayment
exists for 2007 regardless of the amount you owe
with your return. Any shortfall can be paid on
April 15, 2008, without penalty.