An accelerated schedule for certain taxpayers - estimated tax payments

Nation's Business, Feb, 1992 by Albert B. Ellentuck

Just before Congress adjourned for 1991, the lawmakers passed and the president signed legislation extending unemployment-compensation benefits for certain jobless workers. To pay for the extension, Congress stepped up estimated tax payments for certain middle- and upper-income taxpayers whose incomes have increased significantly in the past year.

First, the background: Most small-business owners must make quarterly estimated tax payments if they do business as sole proprietors, partners, or owners of S corporations. It is difficult, however, for most owners to estimate net taxable income every three months to calculate an estimated tax payment. Thus, Congress developed the so-called "safe estimate," in which an individual could estimate taxes for the current year based on the taxes paid for the prior year. (See the December 1990 column.)

Take the example of "Joe Doaks," a sole proprietor who paid federal taxes of $10,000 in 1990. Even if his income and taxes owed for 1991 tripled, he could have paid estimated taxes of $10,000 ($2,500 for each quarter) for 1991. There would be no penalty for underestimation.

However, for 1992 to 1996, Doaks would not be able to use the safe-estimate technique if all three of these circumstances apply:

* His adjusted gross income as modified for the current year increases by more than $40,000 over last year.

* His adjusted gross income as shown on his current-year return is more than $75,000.

* He was required to make estimated tax payments in either 1989, 1990, or 1991.

If those circumstances apply to Doaks, he must generally pay 90 percent of his 1992 tax (with certain possible adjustments). For example, if his 1992 tax as adjusted is $30,000, he must pay $27,000 in estimated payments for the year.

Congress did not make this rule applicable to the first estimate, however, and so his first 1992 estimated payment can be equal to one-fourth of his last year's tax; for him, that payment would be $2,500. However, since that $2,500 payment would be less than one-fourth of 90 percent of his 1992 tax (that is, less than $6,750), the difference of $4,250 must be added to his next installment, which would then total $11,000.

Your accountant may no longer be able to give you estimated-return vouchers that you can use with assurance. You must be alert to your own tax situation. If your accountant thinks the rule might apply to you, your estimated payments--and the accounting fees to make these quarterly calculations--could be higher. But for those whose income does not increase so dramatically or doesn't otherwise come under the new rule, the safe-estimate technique remains.