27.5 Adjusting Your Payments During the Year
If, during the year, your income, expenses, or exemptions change, refigure your estimated tax liability and adjust your payment schedule as shown in the following Examples. Increasing an installment payment cannot make up for an underpayment in a prior period; see Example 2 below. However, withholdings from pay, pensions, and IRA withdrawals can be allocated equally over all four periods and, thus, withholding increased at the end of the year may be applied to earlier periods.
If taxes paid in the previous installments total more than your revised estimate, you cannot obtain a refund at that time. You must wait until you file your final return showing that a refund is due.
1. Smith, who is self-employed, figures that to avoid a penalty for 2011 under the estimated tax rules discussed above, he must make estimated tax installments of $6,000. By April 15, 2011, he pays an installment of $1,500. In June, he amends his estimate, showing a tax of $3,000 instead of $6,000. He refigures the installment schedule by dividing $3,000 by 4, which gives a payment rate of $750 for each period. As he paid $1,500 in April, the $750 overpayment covers his June obligation. By September 15, 2011, he pays $750; by January 17, 2012, he pays $750.
2. In September 2011, Jones finds that his estimated 2011 tax liability should be $25,000 rather than his original estimate of $20,000. He paid $5,000 as his April and June installments ($10,000 total). Under the amended schedule, he should have paid $6,250 per period ($25,000 ÷ 4), $6,250 by April 15 and $6,250 by June 15. Thus, there is a $2,500 underpayment ($12,500 - 10,000) for the first two periods.
To cover the underpayment of $2,500, which carries over to the third payment period (June 1 through August 31), Jones's installment by September 15 must be at least $8,750 ($6,250 + $2,500). If less than $8,750 is paid, there will be an underpayment for the third payment period, as payments in that period are applied first to the carried-over underpayment of $2,500. If at least $8,750 is paid by September 15, there is no third period underpayment to be carried over, so the required installment for the fourth period (September 1 through December 31), due by January 17, 2012, will be $6,250. Unless an exception (27.1) applies, the underpayments for the first two periods will be subject to a penalty.
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