Write From Home-Pay On Time To Avoid Penalties

Pay On Time To Avoid Penalties
by Julian Block

Stay on top of the deadlines for filing federal returns and the due dates for making payments. Overlook one and you might incur a sizable, nondeductible penalty.

Tuesday, January 18 (the usual date of January 15 falls on a Saturday this year), is a key date for many individuals to remember. That is the due date for the final quarterly installment of your estimated income tax (including any self-employment tax) for 2004, if you must make payments because your estimated tax is more than $1,000. But it's OK to skip this final payment, provided you submit your 2004 return and pay your tax in full by Monday, January 31.

Who is supposed to make estimated payments? Individuals with income from sources not subject to withholding of taxes (for the most part, taxes withheld by employers from paychecks). Mainly, they are freelance writers and other self-employeds who operate businesses or professions as sole proprietorships, in partnerships with others or as independent contractors.

The IRS warns that even when withholding is subtracted from salaries, bonuses and other kinds of earnings, it might prove insufficient. The agency can exact penalties for insufficient quarterly payments or for failure to pay the installments on time as they become due. It matters not that your final estimated payments are enough to eliminate any balance due when you submit 2004's 1040 form in 2005.

There are "safe harbors" or exceptions that relieve you of any penalties for above $1,000 underpayments. Fret not about penalties, provided you made payments for tax year 2004 (be sure to include withholding taken from paychecks or an overpayment of 2003's taxes that you elect to apply to 2004's bill) by the due dates of April 15, June 15, Sept. 15, and Jan. 18 that exceed a specific benchmark.

Those payments must be more than the least of the following three amounts:

(1) 90 percent of the actual taxes you owe for 2004.

(2) 100 percent of the taxes you paid for 2003 (the figure on line 60 of 2003's 1040 form).

This is so even if the amount due was zero, provided the return covered 12 months.

The second exception—the prior year's tax—makes use of a fixed number; so it's the easiest way for most individuals to figure their payments and escape penalties. To illustrate, your tax payments total $11,000 for 2003 and $12,000 through estimates or withholding in 2004. With those kinds of numbers, you are home free, no matter how much 2004's liability turns out to be.

(3) 90 percent of the actual taxes you owe for 2004, figured by annualizing income actually received by the end of the quarter in question.

The third escape clause mainly helps persons who receive the bulk of their incomes late in 2004--for instance, freelance writers who receive book royalties in Dec.

The second exception for the prior year's tax does not apply when adjusted gross income (the amount on the last line of page one of Form 1040) surpasses $150,000 ($75,000 for marrieds filing separately). To take advantage of the 100-percent escape hatch, estimated payments must be at least equal to (1) 90 percent of the actual taxes you owe for 2004 or (2) 110 percent of your tax liability for 2003, whichever is the lesser figure.

Julian Block is a syndicated columnist, attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." His "Tax Tips For Freelance Writers, Photographers And Artists" shows how to save truly big money on taxes—legally—and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. Send $9.95 for an e-mailed copy or $14.95 (in the U.S.) for a postpaid copy to:

J. Block
3 Washington Square, #1-G
Larchmont, NY 10538-2032.

Contact him at julianblock@yahoo.com

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