Many taxpayers have income on which there is no withholding, such as interest, dividends, rental or royalty income, or business income. If this is your situation, you’ll want to see if you’re required to make estimated tax payments in 2012 in order to avoid the penalty for underpayment of your taxes.

    The tax system is “pay as you go” by law. If you have income on which no taxes are withheld, it is up to you to prepay the proper amount of taxes. Generally, if you expect to owe at least $1,000 in federal taxes and your withholding and tax credits are less than 90% of your 2012 tax liability (or less than 100% of your 2011 tax liability), estimated tax payments are required. You are essentially required to “estimate” your income and taxes, and make the appropriate payments. Additionally, your estimated tax payments must be computed to also pay for any self-employment (i.e. FICA) taxes on your net business and/or partnership income that you might also owe.

    How do you make your “estimates” in order to comply with the IRS requirements? You should use the worksheets found in Form 1040-ES for the 2012 tax year. Once you compute your estimated income and taxes, you pay them in four installments with due dates of April 15, June 15, September 15, and January 15 of the following year.

    The penalties for not properly paying your taxes on a timely basis can be severe. It’s certainly not something that you want to ignore or overlook. And the computations can be tricky. Also, there are special rules for farmers, fishermen, and high-income taxpayers. Your best bet is to have a qualified tax professional review your 2012 tax issues and assist you in determining whether any estimated payments might be required.

 

    David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.