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Uncle Sam Keeps Ringing: Estimated Taxes

Now that you are done with this year’s taxes, you can start worrying about next year’s taxes—and whether you need to pay estimated taxes.

The need to file an estimated return is tied to a penalty for underpaying your taxes, notes CCH, a leading provider of tax, accounting and audit information. Individuals are expected to pay almost all their tax—through withholding or estimated taxes or both—before filing on April 15. If you fall short by more than a certain amount, you have to pay a penalty and generally have to file an estimated return for the following year, along with the first of four quarterly payments.

What is that “certain amount,” and what can keep you clear of penalties and estimated tax?

Simplifying somewhat, if you owe less than $1,000 when your return is due, you won’t owe a penalty, and you can avoid estimated tax if you figure that you won’t owe more than $1,000 when you file next year’s return.

If you expect to owe at least $1,000 in tax for 2009, you then have to consider how much your withholding and credits for 2009 will add up to. If you figure they will total 90% of your 2009 tax or 100% of your 2008 tax, you don’t need to pay estimated tax.

High-income taxpayers whose adjusted gross income for 2008 was more than $150,000 (or more than $75,000 for those who are married filing separately) can’t escape having to file estimated tax unless their 2009 withholding and credits will be at least 110% of their 2008 tax.

Those who do make estimated payments have a few options—and some potential pitfalls. While many will compute their estimated tax obligation once and then pay it in four equal installments, it is possible to match the size of the quarterly payments to the flow of income. You aren’t required to make a payment until the first quarter in which you have income subject to estimated tax, but you can pay earlier than you have to if you wish—such as paying your estimated tax for the entire year on April 15.

In figuring your potential 2009 tax burden, you should take into account changes in the tax laws effective for this year. Form 1040-ES has a list of these changes, and refers taxpayers to Publication 505, Tax Withholding and Estimated Tax for more information. But the form itself still has incorrect information on the alternative minimum tax AMT exemption amounts. Instead of declining for 2009, as the form states, AMT exemption amounts are actually increasing—to $46,700 for single filers and $70,950 for joint filers (as Publication 505 makes clear).

If the income that produces your estimated tax liability comes unevenly through the year, you should consult IRS Publication 505 for a worksheet on the “annualized income installment method” for figuring your payments.

Source: CCH, a Wolters Kluwer business; CCH is based in Riverwoods, Ill.

Post-Filing Tips for Protecting Your Tax Data

Tens of millions of tax returns have just been prepared and/or filed electronically. While electronic filing provides a convenience people value, it also creates a great risk of identity theft, as personal information used in tax preparation could be easily exposed to hackers and identity thieves.

Here are some simple, effective post-tax-time tips for securing your tax documents, from Todd Feinman, CEO of Identity Finder, LLC (www.identityfinder.com), a specialist in security and identity theft prevention software.

  • When storing a copy of your tax return on your computer, make sure you secure it with a password so that your Social Security number cannot be read if the file is lost.
  • Securely delete all electronic financial documents used to prepare your tax returns so any personal information is safe.
  • Ignore all refund/rebate/warning E-mails claiming to come from the IRS, and never click on a link within those E-mails because it is most likely a phishing attack.
  • Check your credit report with one of the three credit bureaus for free every four months at www.annualcreditreport.com to make sure your identity hasn’t already been stolen.
  • Install the latest updates to your operating system so known Windows or Mac vulnerabilities can’t be exploited by hackers.
  • Don’t save your password in your Web browser when accessing banks and other institutions that keep your personal information because it could be leaked if you ever get a virus, Trojan, or are hacked.
  • If you provided your bank account and routing information to the IRS for payment or refunds, check your bank accounts to ensure the proper transfer occurred.
  • Visit your bank account on-line and set up alerts on your accounts to monitor when high amounts of cash are withdrawn.
  • Make sure you do not receive incorrect payment liability or refund information; a thief could have filed a tax return on your behalf fraudulently.

Source: Identity Finder, LLC, headquartered in New York City.


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