But for 2012, we overpaid our state and local taxes by a lot. Our accountant tried to comfort us: many of her clients did the same.
She said the negotiations at the federal level over the so-called fiscal cliff tax increases and budget cuts, which stretched into January, kept accountants from knowing who would be subject to the alternative minimum tax until just about the filing date for estimated taxes. The A.M.T., as it is known, ensures that people with a lot of deductions still pay federal tax. Those who fall into it lose various deductions, like state and local taxes and mortgage interest.
We made an estimated tax payment in January based on the worst-case situation, and when that didn’t happen, we discovered we had overpaid. But we also made the mistake of filing a paper return in New York, and the state has had huge delays in getting refunds to people who did not file electronically.
As we wait for that New York refund, I’ve thought about the increasingly confusing calculations that people who earn income from different sources — or have taxes withheld at different rates — have to make when it comes to paying estimated taxes.
“In years past, it was pretty easy to do a back-of-the-envelope calculation,” said Joshua Dubrow, a certified public accountant with Nussbaum, Yates, Berg, Klein Wolpow. “Now with these new rules, with investment income taxes, Obamacare, the phase-out of deductions, not even the sharpest and most accurate practitioner can do a prediction. It’s more important to be on top of this and crunch the numbers.”
With the next estimated payment due on Sept. 15 — and the end-of-year reckoning not too far away — here are some things to consider and a few tips for the areas where you can have control over your tax payments.
Technology is no advantage Filing electronically usually gets you faster processing, but it is not always possible. Allison P. Shipley, principal in PricewaterhouseCooper’s Private Company Services practice, said people with complicated earnings and income had to file paper returns because their tax preparer’s e-filing software might not accept a certain form or there might be limits to the number of one form that can be submitted. She said that the Internal Revenue Service required that other forms be mailed in, like the one for noncash charitable contributions.
Those who file electronically are not guaranteed a quick refund. My accountant said a client filed his 2012 federal return electronically and included routing information to get his five-figure refund wired to his bank account. Instead he received a letter saying the return could not be processed electronically. The reason? The amount on the refund no longer matched the amount on the return. Eventually he received the refund by mail, less $7.49 for unpaid taxes from 2010.
Watch state penalties There are three ways to pay estimated taxes, and you can select a new method each quarter. You can pay in 100 or 110 percent of last year’s tax (depending on your income), pay 90 percent of this year’s tax or “annualize” your tax. With this last method, if you made $50,000 in the first quarter you would pay tax at a rate based on an annual income of $200,000. If in the second quarter you made $40,000, you would adjust your tax to an income of $180,000 and so on.
The goal is usually the same: to pay just enough to make sure you don’t get hit with a penalty. Yet some times, it makes sense to pay that penalty and hold on to the cash, said Elda Di Re, a partner in Ernst Young’s personal financial services group. For example, when you don’t have the money to pay the tax on time or when you believe you can get a high return on the money. At 3 percent for federal taxes, she called the penalty “not a bad borrowing rate.”
Article source: http://www.nytimes.com/2013/08/24/your-money/a-guessing-game-on-taxes-owed.html?partner=rss&emc=rss
