27.2 Planning Estimated Tax Payments for 2011

In planning your payments for 2011, you may not want to pay any more than is necessary to avoid a penalty. You can avoid a penalty for 2011 by planning payments in 2011 that meet the 90% current-year test or the 100%/110% prior-year safe harbor.

90% current-year test. If you expect your income, deductions, and tax credits for 2011 to be about the same as they were for 2010, and you will not have any additional liabilities for 2011that you did not have for 2010, such as for alternative minimum tax (AMT), self-employment tax, household employee taxes, penalty taxes, or recapture taxes, you can base your 2011 withholdings and quarterly estimated tax installments on 90% of your 2010 total tax.

If you expect your 2011 total tax to be lower than your 2010 total tax, such as where your income has dropped, you can base your 2011 withholdings and estimated tax installments on 90% of the estimated 2011 total tax.

You can use the 2011 Estimated Tax Worksheet in the instructions to Form 1040-ES for 2011 to figure the required annual payment under the 90% test, as well as under the prior-year safe harbor test discussed next.

Planning Reminder

Annualized Income Method

If your income typically fluctuates throughout the year, or if your income unexpectedly changes during the year, you may base installment payments on the annualized income method. This method allows you to avoid a penalty for installment periods during which less income is earned by reducing the required estimated tax payment for such periods. To figure your installment payments, use the Annualized Estimated Tax Worksheet in IRS Publication 505. If you base installment payments on the annualized method, you must file Form 2210 with your return to determine if you are subject to an estimated tax penalty.

Safe harbor for 2011 based on 2010 tax. If you are uncertain of the amount of your 2011 income and deductions, you can play it safe and avoid a possible penalty for 2011 by having 2011 withholdings and quarterly estimated tax installments equal to your 2010 total tax if your 2010 adjusted gross income is $150,000 or less ($75,000 or less if married filing separately for 2011), provided you filed a 2010 return covering a full 12 months. If your 2010 AGI exceeds the $150,000 (or $75,000) threshold, your payments for 2011 must be at least 110% of your 2010 tax.

If an accurate estimate for 2011 is possible, it is generally advantageous to base your estimated payments on the 90% test rather than the 100%/110% prior year test, as using this prior year test will probably result in an overestimation of your liability unless the 2011 tax turns out to be substantially larger than the 2010 tax.

You may use the worksheet and the tax rate schedule included in the 2011 Form 1040-ES to figure your estimated tax liability and the required annual payment to avoid a penalty under either the 90% current-year or the 100%/110% prior-year liability tests.

Making estimated tax payments. Reduce your 2011 estimated tax liability by expected withholdings from wages, pensions, and annuities. If after withholdings your estimated tax is $1,000 or more, you must make estimated tax payments unless the withholdings will cover at least 90% of your estimated 2011 liability or 100%/110% of your 2010 liability. If withholdings will not cover the amount required under the 90% or 100%/110% tests, you may pay the balance of the estimated tax with Form 1040-ES vouchers or by credit card. You may schedule electronic payments using the Electronic Federal Tax Payment System (EFTPS), or you can make estimated tax payments by direct debit from your checking or savings account if you electronically file your 2010 return. See the 2011 Form 1040-ES instructions for details on the payment options.

Crediting 2010 refund to 2011 estimated tax. If you are due a refund when you file your 2010 return, it may be credited to your 2011 estimated tax. You may also split up the amount due you. You may take part of the overpayment as a refund. The other part may be credited to your estimate of 2011 taxes. The IRS will credit the refund to the April installment of 2011 estimated tax unless you attach a statement to your return instructing the IRS to apply the refund to later installments.

Check your arithmetic before you apply an overpayment as a credit on your next year's estimate. If you apply too much, the amount credited may not be used to offset any additional tax due that the IRS determines you owe. For example, your 2010 return shows a $500 refund due, and you apply it towards your 2011 estimated tax. However, the IRS determines that you overpaid $200, not $500. You will be billed for the additional $300 tax, plus interest due; you may not offset the extra tax with the credited amount.

Planning Reminder

Credit Card or Electronic Payments

You may charge estimated tax payments using a Visa, MasterCard, American Express, or Discover Card. See the Form 1040-ES instructions. If you charge estimated tax payments, you do not have to file Form 1040-ES vouchers.

You may also make your payments electronically by authorizing withdrawals from your checking or savings account. You can schedule payments through EFTPS (Electronic Federal Tax Payment System) by enrolling online (www.eftps.gov) or by phone (1-800-316-6541). If you file your 2010 return electronically, your tax preparation software will allow you to schedule up to four 2011 estimated tax payments.

Farmers or fishermen. In figuring the required annual payment to avoid a penalty for 2011, a farmer or fisherman has to pay only 66% of the 2011 estimated liability, rather than 90%. A penalty may also be avoided by paying 100% of the 2010 tax, provided a tax return covering a 12-month period was filed for 2010; the 110% test for higher-income taxpayers does not apply to a farmer or fisherman. To qualify as a farmer or fisherman under these rules, at least two-thirds of gross income for 2010 or 2011 must be from farming or fishing.

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