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Federal Employees News Digest : April 8, 2013
April 8, 2013 Vol. 62, No. 36 7 Visit us on the internet at www.FederalDaily.com For most federal employees, there is only one "tax day" that occurs once a year around April 15. But for individuals who must pay "estimated" taxes--- federal, state or both---the IRS and/or state revenue agency expect a tax payment four times a year. This column discusses which employees must pay estimat- ed taxes and why and when these payments are due. Any employee may have to pay estimated taxes if any of the following situations apply: • An employee sold a capital asset—for example, a stock, a bond, an open-ended or closed-end fund, or an exchange traded fund---at a gain and the employee's payroll income tax withholding is insufficient to pay the federal and state income due on the recognized gain. • An employee or employee’s spouse becomes self-employed during the year and owes federal and state income and self-employment taxes on their net profit. • An employee has investment income from other sources— banks, brokerages, partnerships---that were not taken into account when the employee filled out their W-4 for 2013 (and state equivalent withholding certificate). An employee who expects to owe $1,000 or more in federal taxes when they file their 2013 income taxes in spring of 2014 should either increase the amount of their withholding or make estimated tax payments. For the 2013 tax year, federal estimated tax payments are due April 15, June 17, Sept. 16 and Jan. 15, 2014. All payments should be accompanied by Form 1040-ES, which can be downloaded from www.irs.gov. Form 1040-ES is a voucher; there are four vouchers with the due date for each voucher listed on the voucher. To avoid any interest charges that would result if an individual were to pay an insufficient amount of estimated tax payments, an individual must pay at least enough to satisfy one of three "safe harbor" guidelines. When calculating the amount of their estimated tax payments, employees should include any with- holding when calculating their payments. The safe harbors are: • Safe harbor 1. For employees with adjusted gross income of $150,000 or less, they will be "safe" for 2013 if they pay in at least the tax liability number shown on their 2012 income tax return (line 61 of Form 1040). Example. Frank, a single employee, had an adjusted gross income of $85,000 and a federal tax liability of $16,000. Frank expects to have $14,000 in federal taxes withheld from his paycheck. By paying $2,000 in federal estimated taxes during 2013, Frank will avoid an under-withholding penalty. • Safe-harbor 2. For employees with adjusted gross income over $150,000, they are covered if they pay in through withholding and estimated tax payment 110 percent of last year's tax liability. • Safe harbor 3. Regardless of their income dur- ing 2012, employees pay in at least 90 percent of their 2013 federal tax liability. This may require some guesswork on the employee's part as to what their tax liability will be for 2013. The IRS charges interest if an employee misses an estimated tax payment or makes a late payment. There are several alternatives to avoid or at least minimize the interest charge. One way to reduce or to eliminate the interest charge from missed or late estimated tax payments is by increasing withhold- ing from a paycheck. Employees can fill out a W-4 to request additional federal income taxes be with- held from their paychecks for the remainder of the calendar year. Another way to make up for missed estimated payments earlier in the year is to make oversized estimated payments to compensate for earlier underpayments. For example, suppose an individual had an estimated tax payment of $800 due on April 15 but missed the payment. If the employee pays $1,600 on June 17, the employee is "caught up." But the employee will be charged two months interest---the IRS annual interest charge is currently 3 percent---on the $800 shortfall (approximately $4). While the estimated tax payment rules seem fairly straightfor- ward, there is an important issue that employees should be aware of. Employees should not view their tax liability on an annual basis but rather on a quarterly basis. According to IRS rules, the tax year is divided into four quarters: (1) Quarter 1: Jan. 1 to March 31; (2) Quarter 2: April 1 to May 31; (3) Quarter 3: June 1 to Aug. 31; and (4) Quarter 4: Sept. 1 to Dec. 31. If an individual is using either the 90 percent of current year tax liability or the 100 percent of the previous year tax liability safe harbors, the 90 percent or 100 percent tests apply to each quarter. That means that if an individual were to use the 90 percent safe harbor and incurs a huge capital gain in June, July or August of 2013, then the Sept. 16 estimated tax payment, together with the total fed- eral income tax withholding during June through Aug. 31, must equal at least 90 percent of the expected tax liability for the third quarter of 2013. Additional information about tax withholding and estimated tax payments may be obtained from IRS Publication 505 (Tax Withholding and Estimated Tax), which can be downloaded from www.irs.gov. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. informed investor When employees have to make estimated tax payments
April 1, 2013
April 15, 2013