another question about quarterly taxes...

[pokerraja]

I recently about 2 weeks ago received a letter from the IRS stating I have to pay my quarterly taxes by Sept 15th. I totally forgot about them til that point. My tax preparer did mention about them to me last april. I figured I could just pay them next april with my other taxes.

So, since I totally forgot the quarterlies till I got this notice from the IRS. How many quarterlies have I missed for this year so far? ( sorry seems like an obvious question). But what im trying to say is that this is the first notice I received from the IRS. Enclosed were two seperate stubs for me to pay for quarterlies.

Also, do i just pay 1/4th of what I paid total last year on my gambling winnings taxes? Even though im gonna make at least twice that this year? Sorry for newbie questions. Thanks to anyone who takes the time to respond. Much appreciated.

[broiler]

So far, you have missed 2 estimated tax payments for this year plus the third payment is due 9/15. You will be subject to the underpayment penalty for missing the first 2 payments. At this point, I would add the first two payments to the payment due on the 15th. You want to stop the penalty calculation as soon as possible.

The amount that you should pay in is based upon last years taxes due since you expect to make more money this year. You need to have 75% of your prior year tax paid in by the 15th, unless your 2005 adjusted gross income was over $150k which would require you to increase your prior year tax by 10% and then have 75% of that amount paid in by 9/15. The amount that you have paid in should also include any withholding that you might have from other sources.

If you really end up with double the income of 2005, then you will still have a balance due on 4/15/07, but the only penalty will be related to the late payment of your first 2 estimates. I recommend keeping a decent amount of cash around for April next year since you will also need to make a first estimated tax payment for 2007 at that time.

Don't forget that the estimated tax rules apply for state taxes as well. You may have the same problem for the state that you have for Federal purposes. Not all states have the same 110% rule as Federal, but most states with taxes have estimated tax requirements.

[pokerraja]

thanks broiler. that makes alot of sense.

I have a full-time job also. Im not sure if that should come into play with my quarterlies or not. Im also wondering if my tax preparer paid my first 2 quarterlies for this year when I did my 2005 taxes (4-15-06). I will need to go back to my file cabinet and look it up. Also, why did I not receive this same IRS envelope for the 2 payments I missed? Sorry again, as im trying to make sense of this.

Im going to call my tax person tommorow just to be safe. but thanks again for any help.

[broiler]

You should definitely factor in any withholding that you have had from your regular job in the calculation of what you will need to pay on 9/15. Your tax preparer should have factored this into any scheduled estimates. Your best bet is to call the person so that the problem can be resolved quickly. The good thing is that you realized the mistake before December, which is when most people remember that they missed the other 3 payments and they don't have enough cash left to make the entire payment required.

The IRS letter that you got with the estimate voucher is just a computer generated letter and vouchers based upon certain items from your 2005 tax return. My brother got his last week and he has always had all of his estimated taxes paid through withholdings. I don't know what the specific item is that generates the letter and vouchers since my brother has no reason to receive them.

The IRS doesn't send the estimate vouchers to you for each payment, they expect you (or your tax preparer) to figure out the need for the payments. I'm sure that the IRS makes out fairly well by not reminding people about the payments and then charging the penalties when the payments are missed.

[DrewOnTilt]

Here's a related question. My significant poker income didn't really start until this year, since up until the end of last year I didn't play at significant stakes and only had to claim a relatively small amount as gambling winnings on my taxes for last year. This year my income from poker will be ridiculously higher than in 2005 since I jumped into higher stakes both feet first around the end of January. I have not made quarterly payments, nor have I received notice from anyone that I should make them this year. If I do make them, do I understand correctly that the payments should be based on my return from last year? The 2006 and 2005 numbers won't even come close to matching.

What gives? I should have contacted a CPA by now but I'm just lazy I guess.

[broiler]

You are correct that your required payment for estimated taxes will be based upon 2005. Estimated taxes can be calculated using either the prior year or the current year and you obviously choose the one that results in making smaller payments.

Since you will be paying estimated taxes using a lower income year, you will end up with a balance due in April, but none of that will be penalty (except to the extent that you might have missed the first 2 payments). Some people choose to pay more than the required minimum in estimated taxes because of poor cash management and you should factor that into your decision of how much to pay. The balance due for 2006 plus a first estimate for 2007 in April can be more cash than most people keep on hand.

You should see an accountant as soon as possible in order to get everything sorted out. The good thing is that you are looking into this now, which is before December when most people remember that they have missed payments and have spent all of their cash on holiday shopping.

[DrewOnTilt]

[ QUOTE ]
The balance due for 2006 plus a first estimate for 2007 in April can be more cash than most people keep on hand.


[/ QUOTE ]

Gah, I didn't even consider that part about the first quarter of 2007. Thanks for pointing it out. I need to do some planning, considering that my 2007 estimated taxes will be based on my 2006 higher income.

[James282]

broiler, in talking to my accountant, he told me that it is fine if I pay taxes on the exact amount I have made up until that point for the year - since my poker winnings are so erratic(I took almost a whole quarter off). For this quarter, I'll have only made about 30,000, so I only plan on paying about 10k of that for taxes during this quarter. Next quarter I will hopefully make significantly more than this. Since my income was over 150k last year, was I supposed to pay more during the year and then ask for a refund if I didn't make my monetary goals? I probably will wind up making %110 on last year's money and will definitely have this paid off by the January 15th quarter on this current schedule, but want to make sure that my accountant is giving me the correct information. Thanks in advance for taking the time to read this.
Peace,
James

[broiler]

Your accountant is doing the exact same thing that I would do in your situation. Since your prior year income was over 150k, you have 2 choices for estimated taxes: 110% of the prior year tax or 100% of the current year tax.

With erratic earnings that will end up in the same ballpark as the prior year, it makes sense to pay 100% of the current year tax. You are allowed to use the annualized installment method (what your accountant did) to calculate the estimated tax payments in order to have your payments more closely match your inflow of income. This is one of the areas where the tax code is quite fair to the taxpayer.

The only reason that I would pay more in your situation is if you were terrible at cash management and there was a chance that you wouldn't save the cash from a good fourth quarter. In that situation, I would have you ridiculously overpaid to protect you from yourself. No offense meant here, but there are people that my office has over 1 year of taxes paid in advance because they would spend it if they ever saw it hit their bank account.

[highland]

[ QUOTE ]
thanks broiler. that makes alot of sense.

I have a full-time job also.


[/ QUOTE ]
You're stuck paying penalties (really interest) on what you're short for the first two quarters. But, since you have a real job, if you increase your withholdings, it counts as if you'd paid that evenly throughout the year. So, if you can get your company to withhold a staggering % of your paycheck for the rest of the year, you might get out with minimal or no penalties.

That said, the penalty isn't that big of a deal: link

You're really not that bad off if you just pay 3 quarters worth before 15 September.

cheers,
-highland