Do You Owe Quarterly Personal Income Taxes on September 15?

If you owe quarterly personal income taxes on September 15th, then congratulations, because that means you have significant taxable income that is not subject to withholding. Just be sure not to spend it all, since the IRS and state taxation authorities will want to collect a portion of your wealth at regular intervals, namely: mid-April, mid-June, mid-September, and mid-January. The less you pay each quarter, the more you may need to pay when you file your annual income tax return. And, there might even be penalties if you underpay your estimated taxes or pay them late.

What triggers the need for estimated individual income tax payments?

There are many potential causes, but here are several categories to consider:

• • Investment Portfolios
    Maybe you own investments that pay regular dividends or occasional capital gain distributions, or you may have sold appreciated stocks or mutual funds during the year. Be warned that reinvested dividends and CGDs in non-retirement accounts are taxable to you, even though you don’t receive any cash.

• • Rental Properties and Pass-through Interests
    Persons owning income-producing rental properties or partnership interests may need to pay quarterly estimates. Ditto for trust beneficiaries and shareholders of profitable S corporations.

• • Retirement Distributions
    Some people owe quarterly estimates based on their distributions from retirement accounts, such as IRAs or 401(k) plans, which are subject to federal income tax but may not be subject to state income tax, depending on where you live. If the withholding on your retirement income, portfolio income, or earned income is too low, you may need to make quarterly estimated tax payments.

• • Miscellaneous Sources
    Similar concerns apply to social security benefits, unemployment compensation, gambling winnings, and spousal maintenance payments that you receive. Persons who are self-employed bear a disproportionately high responsibility for remitting quarterly estimated payments, because they owe both income taxes and social security taxes, which can be an extra 15.3% burden.

• • Incorrect Withholding on Earned Income
    Most employees have adequate withholding on their wages, but some have erroneously low withholding based on improperly completed W-4 forms on file. If you routinely have a large tax balance due at the end of the year, consider reducing the number of withholding allowances claimed or request additional amounts to be withheld by your employer from each paycheck.

The IRS has no preference as to how they collect taxes, either by withholding or by quarterly payments. If your normal withholding is low, then you may need to supplement it using Form 1040-ES payments or by increasing your withholding for the remainder of the year. This is especially important if you expect to receive a year-end bonus that could put you in a higher marginal tax bracket.

How Can DHJJ Help?

If you have questions regarding your particular situation, contact DHJJ at 630-420-1360.