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I got a refund on my taxes last year. Why do I have to pay estimated taxes this year?

by admin 9. July 2010 10:06

I got a refund on my taxes last year. Why do I have to make estimated tax payments this year?

When we prepare your income tax returns, there are two calculations we make to determine if you owe a penalty for underpaying your taxes during the year.

1. Did you pay at least 90% of your current year tax liability equally over the four quarters of the year?
2. Did you pay at least 110% of last year’s tax liability in the current year equally over the four quarters of the year?

If we can answer yes to one of the two questions, you do not owe a penalty for underpayment of taxes.

For example, let’s assume that your tax liability for 2009 turned out to be $10,000. In order to guarantee that you will not owe an underpayment penalty for 2010, you may pay in through either tax withholding or estimated tax payments 110% of that amount or $11,000. Paying the $11,000 guarantees that you will not owe an underpayment penalty for 2010 even if your tax liability for 2010 rises to $1 million dollars.

Let’s further assume that for 2009, you paid $10,500 in taxes during the year, and therefore, received a tax refund of $500. If your 2010 income tax return is exactly the same as your 2009 return, you will again receive a $500 refund.

However, if your tax liability rises to $15,000 and you only pay the same $10,500 in taxes during the year, not only will you owe $4,500 in taxes but you will also owe an underpayment penalty as you did not pay one of the following:
1. 90% of the 2010 tax liability of $15,000 or payments of $13,500.
2. 110% of the 2009 tax liability of $10,000 or payments of $11,000.

As you can see, it is possible to get a tax refund one year and pay a penalty for underpayment the next. Our tax software recognizes situations where this may happen and prints estimated tax vouchers for the current year along with your tax returns for the prior year.

As always, if you have questions about how this applies in your particular situation, please contact us. With tax law, there are exceptions to every rule.

Thanks for reading!!
Frank

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