| At this late stage of the tax filing game, I would like to | | | | plus the first quarter estimate for 2007). Subtract from |
| make an observation and offer some advice on | | | | this balance the $15,000 in estimated payments you |
| extensions and installment agreements. My friends, I | | | | have made during the 2006 tax year, and show a |
| appreciate your reading of my articles and appreciate | | | | balance due of $9,000 on form 4868. Send this $9,000 |
| your listener ship of my radio program, "Better | | | | in with your extension request. This will keep you from |
| Business". Let me return the favor and offer you | | | | having to file a separate estimated coupon (form |
| some more free income tax advice. | | | | 1040ES) and will give you additional protection against |
| If you are going to owe money, don't put your return | | | | penalty. For example, assume that your estimate of |
| on extension thinking this will give you more time to | | | | $20,000 in total tax for 2006 is low by $2,000. You will |
| pay. If you don't have the money to pay, fill out an | | | | now have enough paid in to cover any penalty and |
| installment request, form 9465, and attach it to your | | | | interest charge. The remaining balance of $2,000 from |
| 1040 by April 16 (April 17 for some of you lucky | | | | your extension payment of $9,000 will be applied to |
| taxpayers). The Internal Revenue Service will accept | | | | your 2007 estimates by electing so on your 1040. You |
| this installment agreement without consideration | | | | can then make up any short fall for 2007 by making |
| providing the tax due is paid within a three year period. | | | | more estimated payments or increasing withholding |
| Your state and local governments will also accept this | | | | from your pay. I think this is very clever. |
| form for the most part. For example, if you owe | | | | The final thing I would like to mention to you in this |
| $5,000 on your federal return, but can only send $1,000; | | | | article deals with under estimated tax penalties. There |
| fill out form 9465 to reflect this. You will then be able to | | | | are three essential ways to avoid paying this |
| get a term loan over the next three years to pay the | | | | underestimated penalty. The first way is to pay in |
| remaining balance due. You will be asked to select a | | | | 100% of your previous year's income tax (110% if your |
| time frame, a monthly amount, and a time each month | | | | adjusted gross income for the previous year is |
| you would like to make the payment. Be realistic by | | | | $150,000 or more). The next way is to pay in at least |
| choosing a payment you can afford, but pay it off as | | | | 90% of the current year's income tax liability. You will |
| soon as possible. | | | | need to make an income change consideration in |
| The next issue I would like to discuss with you involves | | | | order to determine which method to use. For instance, |
| federal form 4868. This is the automatic extension | | | | if you had abnormally high income in the previous year |
| request giving you until October 15, 2007 to file your | | | | (i.e., a one time realization of capital gains), it will not |
| 2006 income tax return. The old rules gave a taxpayer | | | | make sense to base your current year's estimate on |
| until August 15th to file the return, allowing for an | | | | last year's income tax liability. It would make more |
| additional extension until October 15th with more | | | | sense to project 90% of your current year's expected |
| involved circumstances. If you are going to owe | | | | liability. The final way to avoid penalty is to consider |
| money and have it to pay but are waiting for more | | | | annualizing your income. Suppose you had a big capital |
| information to complete your return, complete form | | | | gain in December and you owe money because of |
| 4868 by showing the total expected income tax due | | | | this. If you do not annualize your income, the Internal |
| less any withholding and estimated payments. The | | | | Revenue will assume that the gain was earned equally |
| balance remaining is what should be sent with the | | | | throughout the year. This could cause a penalty. To |
| extension request. If you are one of those taxpayers | | | | avoid this, fill out form 2210 and elect to annualize your |
| making estimated tax payments each quarter, | | | | income. Put your capital gain in the fourth quarter of |
| combine your estimate with the mount you expect to | | | | 2006 where it belongs, and eliminate all or a portion of |
| owe. Using our example above suppose your total | | | | any penalty. For those of you using one of the tax |
| liability for 2006 is expected to be $20,000. You have | | | | software programs, this will be an easy calculation. |
| made estimates totaling $15,000 during the year leaving | | | | As always, if you need any help with anything |
| you with a balance due of $5,000. If you project that | | | | mentioned in this or other articles, please do not |
| you will need to make estimates of $4,000 each | | | | hesitate to contact me. I wish to help everyone in the |
| quarter for 2007, show your expected tax liability for | | | | world with there stress over income taxes. |
| 2006 to be $24,000 ($20,000 actual expected tax due | | | | |