Making 2012 Estimated Tax Payments

The first installment of 2012 estimated taxes is due on April 17, 2012. (The second will be due on June 15, 2012, the third on September 15, 2012, and the fourth on January 15, 2013.) Figuring the right amount of estimated tax is more challenging than ever. The reason: We don’t yet know many of the tax rules for 2012.

Expired tax rules
More than 50 tax rules affecting individuals and businesses expired at the end 2011. Most of the rules are noncontroversial; both sides of the aisle in Congress favor an extension. But when will an extension be enacted?

House Speaker Boehner (R-OH) said an extender bill likely would be enacted before the election. If Congress waited until this time to act, it would mean that three of the four estimated tax payments for 2012 will have already been made before we even know what the tax rules for this year will be.

A Ways and Means Committee hearing will be held in late April to consider tax reform that would make some extenders permanent. Ways and Means Committee Chairman Dave Camp (R-MI) said in a joint-statement with Rep. Patrick Tiberi (R-OH), “Far too many provisions in the tax code are temporary, making it hard for employers to plan, invest and create new jobs for American families.” Yah think?

Estimated tax safe harbors
So what are taxpayers supposed to do about their 2012 estimated taxes? They can rely on a safe harbor to avoid any estimated tax penalties for underpayments. This safe harbor requires taxpayers to base 2012 estimated tax on 2011 tax liability. If their 2012 estimated taxes total 100% of the tax 2011 tax bill (or 110% if adjusted gross income in 2011 was more than $150,000), then they are penalty free.

The problem with this safe harbor is that it overtaxes the very people who can least afford it. Suppose you already see that 2012 is not shaping up to be a great year. If you use the 100% safe harbor, you may overpay your estimated taxes and be out-of-pocket for the money that could better be spent reinvesting in your business.

You might consider closely monitoring estimated taxes so you can adjust payments going forward. If you wind up paying at least 90% of the taxes you’ll ultimately owe on your 2012 return through estimated taxes, there will not be any underpayment penalty. You could, for example, make a modest payment now on the theory that your revenues will be down and your taxes will be lower than last year. If, by June, things turn around, you can adjust your second estimated tax payment.

Even if you underpay estimated taxes, the cost is not that great at this time. The underpayment penalty is figured using the IRS interest rate. The rate for the second quarter of 2012 is only 3%!

You can learn more about making estimated tax payments through my book, J.K. Lasser’s Small Business Taxes 2012 and IRS Publication 505.

Bottom line
Monitor the fate of extenders as they move through Congress. Also keep a close eye on your estimated taxes for 2012. Hopefully, it won’t be too long until you’re better able to figure your tax payments for this year. Work with a knowledgeable tax advisor to help you avoid both penalties (however small) for underpayments as well as making interest-free loans to the government via overpayments.

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