Barbara’s Blog

The first installment of 2012 estimated taxes is due on April 17, 2012. (The second will be due on June 15, 2012, the third on September 15, 2012, and the fourth on January 15, 2013.) Figuring the right amount of estimated tax is more challenging than ever. The reason: We don’t yet know many of the tax rules for 2012.

Expired tax rules
More than 50 tax rules affecting individuals and businesses expired at the end 2011. Most of the rules are noncontroversial; both sides of the aisle in Congress favor an extension. But when will an extension be enacted?

House Speaker Boehner (R-OH) said an extender bill likely would be enacted before the election. If Congress waited until this time to act, it would mean that three of the four estimated tax payments for 2012 will have already been made before we even know what the tax rules for this year will be.

A Ways and Means Committee hearing will be held in late April to consider tax reform that would make some extenders permanent. Ways and Means Committee Chairman Dave Camp (R-MI) said in a joint-statement with Rep. Patrick Tiberi (R-OH), “Far too many provisions in the tax code are temporary, making it hard for employers to plan, invest and create new jobs for American families.” Yah think?

Estimated tax safe harbors
So what are taxpayers supposed to do about their 2012 estimated taxes? They can rely on a safe harbor to avoid any estimated tax penalties for underpayments. This safe harbor requires taxpayers to base 2012 estimated tax on 2011 tax liability. If their 2012 estimated taxes total 100% of the tax 2011 tax bill (or 110% if adjusted gross income in 2011 was more than $150,000), then they are penalty free.

The problem with this safe harbor is that it overtaxes the very people who can least afford it. Suppose you already see that 2012 is not shaping up to be a great year. If you use the 100% safe harbor, you may overpay your estimated taxes and be out-of-pocket for the money that could better be spent reinvesting in your business.

You might consider closely monitoring estimated taxes so you can adjust payments going forward. If you wind up paying at least 90% of the taxes you’ll ultimately owe on your 2012 return through estimated taxes, there will not be any underpayment penalty. You could, for example, make a modest payment now on the theory that your revenues will be down and your taxes will be lower than last year. If, by June, things turn around, you can adjust your second estimated tax payment.

Even if you underpay estimated taxes, the cost is not that great at this time. The underpayment penalty is figured using the IRS interest rate. The rate for the second quarter of 2012 is only 3%!

You can learn more about making estimated tax payments through my book, J.K. Lasser’s Small Business Taxes 2012 and IRS Publication 505.

Bottom line
Monitor the fate of extenders as they move through Congress. Also keep a close eye on your estimated taxes for 2012. Hopefully, it won’t be too long until you’re better able to figure your tax payments for this year. Work with a knowledgeable tax advisor to help you avoid both penalties (however small) for underpayments as well as making interest-free loans to the government via overpayments.

Self-employed people and owners of partnerships, limited liability companies, and S corporations pay tax on their business income on their personal income tax returns. To cover this tax liability, they must make quarterly estimated tax payments; falling short on tax payments can result in a tax penalty. With many businesses struggling, owners should reconsider what they advance to the government via estimated tax payments.

Paying the least amount required to avoid penalty puts more money into owners’ pockets now. No penalty will apply if tax payments throughout the year—estimated tax payments as well as withholding on wages (perhaps the wages of an owner’s spouse)—meet either of these safe harbors:

1. Estimated tax payments are at least 90% of the tax bill for 2009, or
2. 100% of the tax bill for 2008 (110% if adjusted gross income in 2008 was more than $150,000 or $75,000 if married filing separately).

Minimize payments by basing estimates on last year’s taxes if you think 2009 may be a better year; use the current year rule if you think 2009 will shape up to be worse for you than 2008. For example, if you expect 2009 to be a loss year for your business and you use the current year safe harbor rule, you may owe little or no estimated taxes this year.

If you do owe estimated tax payments, they can be charged to a major credit card, although this can be a pricey option. There’s a 2.49% convenience fee paid to the IRS-approved credit card processor (Official Payments Corporation or Link2Gov Corporation) as well as any interest to the credit card issuer if the balance isn’t paid in full when due.

Even if estimated payments fall short of these safe harbors, the cost of an estimated tax penalty today is low. The current interest rate used to figure the penalty is only 5%; the rate resets quarterly.