May 2000

HOW TO PAY THE MINIMUM IN ESTIMATED TAX WITHOUT TRIGGERING THE ESTIMATED-TAX UNDERPAYMENT PENALTY

Why is it necessary for you to make estimated tax payments? What are the applicable rules for paying the minimum amount of estimated tax without triggering the penalty for underpayment of estimated tax?

Individuals must pay 25% of a 'required annual payment' by April 15, June 15, September 15, and January 15, to avoid an underpayment penalty. (When that date falls on a weekend or holiday, the payment is due on the next business day). The required annual payment for most individuals is the lower of 90% of the tax shown on the current year's return or 100% of the tax shown on the return for the previous year. Higher income individuals must meet a tougher requirement. For 2000 estimated tax payments, if the adjusted gross income on your 1999 return was over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of your 2000 tax or 108.6% of your 1999 tax. Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employer from their paycheck.

If you fail to make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by IRS on deficiencies, times the amount of the underpayment for the period of the underpayment. The penalty is avoided if you meet certain specified exceptions or waivers, described below.

Most people who must make estimated tax payments do so in four installments. In other words, the required annual payment is divided by four, and four equal payments are made by the April, June, September, and January payment dates. However, you may be able to make smaller payments under the annualized income method. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and August, no estimated payment is required before September 15th. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities that you sell at various times during the year.

The underpayment penalty doesn't apply to you:
1. If the balance of tax due on your return is less than $1,000 (your tax liability less withholding tax paid);
2. If you were a U.S. citizen or resident for the entire preceding year, that year consisted of a full year (12 months), and you had no tax liability for that year;
3. If you are a farmer or fisherman and pay your entire estimated tax by January 15th of the following year, or pay your entire estimated tax by March 1st of the following year and also file your tax return by that date; or
4. For the fourth (January 15th) installment, if you aren't a farmer or fisherman, file your return by January 31st of the following year, and pay your tax in full.

In addition, the IRS may waive the penalty if the failure to pay enough in estimated tax was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

If you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have any other specific questions about how the estimated tax rules apply to your particular circumstances, please call us.

Please call us if you would like to discuss the details of your particular circumstances.

Veres & Company
Certified Public Accountants
Freedom Square Office Park
4401 Rockside Road, Suite 406
Independence, Ohio 44131
(216) 524-8422
Fax (216) 524-2624
e-mail: staff@veres.com