For tax years beginning in 2009 only, the American Recovery and Reinvestment Act of 2009 (ARRA) reduced the amount of estimated tax that individual taxpayers with income from small businesses must pay. As 2009 draws to a close, practitioners should make sure their clients are aware of and taking advantage of the new rule.
Taxpayers who do not have their taxes withheld (or do not have enough withheld) may have to make estimated tax payments. Self-employed taxpayers generally will have to pay their taxes this way. Taxpayers may also have to pay estimated tax if they receive income such as dividends, interest, capital gains, pensions, gambling winnings, rents or royalties, because there is generally no withholding on such amounts. Estimated tax is used to pay not only income tax but also self-employment tax, household employee tax, and the alternative minimum tax.
Under IRC § 6654, a taxpayer must pay estimated tax if both of the following apply:
The taxpayer expects to owe at least $1,000 in tax for the current year after subtracting any withholding and credits (and owed tax in the preceding year); and
The taxpayer’s withholding and credits are expected to be less than the smaller of: (1) 90% of the tax that the taxpayer expects to owe or (2) 100% of the taxpayer’s tax liability shown on the prior-year’s return (110% if the prior-year adjusted gross income was greater than $150,000).
SPECIAL RULE FOR 2009
For 2009, in computing estimated taxes, a qualified individual uses 90% of the tax shown on the individual’s return for the preceding year instead of 100% (IRC § 6654(d)(1)(D)(i) as amended by ARRA § 1212). For purposes of this special rule for 2009 tax years, “qualified individual” means any individual:
Whose adjusted gross income shown on his or her tax return for the preceding tax year is less than $500,000 ($250,000 for a married taxpayer filing separately); and
Who certifies that more than 50% of the gross income shown on his or her tax return for the preceding tax year was income from a small business.
For this purpose, income from a small business means income from a trade or business with an average of fewer than 500 employees for the calendar year ending with or within the individual’s preceding tax year.
Practice tip: The instructions for the 2009 Form 1040-ES, Estimated Tax for Individuals, have not been updated to reflect the changes made by the ARRA. Instead the IRS has inserted a cautionary note warning taxpayers that ARRA changes “might affect your calculation of estimated tax.”
WHEN ESTIMATED TAXES ARE DUE
Estimated tax payments are due four times per year: April 15, June 15, Sept. 15, and Jan. 15 (or the next business day if the due date is a legal holiday or weekend day). The estimated tax payments do not have to be the same amount in each period. If a taxpayer does not pay enough tax by the due date of each of the payment periods, he or she may be charged a penalty when filing his or her income tax return even if a refund is due.
For a detailed discussion of the issues in this area, see “Changes to Estimated Tax Payment Requirements,” by Alan Wong, CPA, in the October 2009 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following subjects in the October 2009 issue of The Tax Adviser:
An update on S corporation developments.
Recent tax changes affecting individuals.
Last-minute GST planning for 2009.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail firstname.lastname@example.org for a subscription to the magazine or to become a member of the Tax Section.