Simple Question, Two CPAs, Two Different Answers


A

aaxiom2006

My 2005 tax liability is about $1,000.

During 2006, I expect to claim enormus long-term capital
gains, qualified dividends, etc. I have no earnings subject
to withholding.

Question: What do I need to pay for 2006 estimated taxes?

Two PAID CPAs give me two different answers:

CPA #1: I need to pay 110% of last year's tax liability
(preferably on a quarterly basis) to avoid underpayment
penalty.

CPA #2: I need to "pay as I go" using Form 2210.

Do I need to pay ten advisors and take an average? ;-)

Seriously, can anyone point me in the right direction? The
publications and instructions for all related forms appear
to conflict with one another... I just want to do this RIGHT
so that I don't overpay if I can avoid it.

MANY thanks in advance!
aax
 
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P

Phil Marti

My 2005 tax liability is about $1,000.
This is total tax, line 63 of your 2005 1040, right?
During 2006, I expect to claim enormus long-term capital
gains, qualified dividends, etc. I have no earnings subject
to withholding.
I assume you expect your 2006 tax to be higher than 2005.
Question: What do I need to pay for 2006 estimated taxes?
100% of your 2005 total tax (110% if 2005 AGI was $150,000
or more). The payment must be in four equal installments on
the 2006 ES tax due dates. (You can prepay if you like.)

IRS Publication 505 is the source. If you'd expand on what
you're finding confusing, perhaps we can clear it up for
you.
 
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B

bono9763

The answer depends on what your goal is. Do you want to be
close to your 2006 tax liability and not have to pay a large
amount when you file your 2006 return? Then follow the
advice of CPA #2.

Do you not care how much you have to pay when you file next
year, as long as there aren't any penalties? Then follow the
advice of CPA #1. Here is how you can avoid paying a penalty
when you file next year:

Pay estimated taxes of either

90% of the tax shown on your 2006 tax return, or
100% the tax shown on your 2005 tax return (110% of that
amount if you are not a farmer or fisherman and your
adjusted gross income (AGI) shown on that return is more
than $150,000, or, if married filing separately for 2005,
more than $75,000) or

An amount such that the tax you owe is less than $1,000.

Dennis
 
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E

ed

Use the form 2210 Schedule AI Annualized Income Method if
your windfall comes in later than the first quarter. If it
comes in the first quarter you may as well pay 1/4 of last
year's taxes (only 110% if your AGI was over $150K last
year). The AI will automatically make this choice for you
because it uses the lowest available method. Next year, if
you don't get all this extra income you will definitely want
to use the AI instead of 1/4 of 110%.

ed
 
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L

LTSLLC

Actually both of the CPAs are correct. You can do either one
or both. However, the first CPA's advice only applies to how
to avoid getting charged the estimated tax penalty and
doesn't take into account that you will owe much more in
taxes than in 2005, so you will still need to make a tax
payment when you file your 2006 tax return. The second CPA
got it right but I guess didn't explain that it is much more
work to estimate your income and estimated tax payments.

Easy method
You can pay four quarlerly payments of $275 each that will
equal 110% of the amount of your 2005 income taxes of $1000.
That way, when your 2006 tax return is filed when due in
2007, you won't owe an estimated tax penalty. However, based
on your larger 2006 income, your estimated tax payments
won't be enough to cover the total tax that will be due so
you will have to send a payment with your tax return when it
is filed to cover the difference between your total
estimated tax payments of $1100 and what your total tax will
be, say, $8000, so you will need to send a check in for
$6900 with your tax return.

More accurate method
If you don't want to have to make a payment for any unpaid income tax
when your 2006 tax return is due, then you simply estimate what your
income will be for each quarter and pay the appropriate amount of
estimated tax payment for each quarter. When you file your 2006 tax
return, then you may owe or you may get a refund, depending on how
accurately you estimated your income and estitmated tax payment for
each quarter.

See Pub 505, Tax Withholding and Estimated Tax
http://www.irs.gov/publications/p505/index.html

To figure your 2006 estimated tax payments for each quarter,
see this link
http://www.irs.gov/publications/p505/ch02.html#d0e5600
From Pub 505 Chapter 4 .(NOTE that these apply to tax year 2005, so
simply substitute 2006 for 2005 and substitute 2005 for 2004)

http://www.irs.gov/publications/p505/ch04.html

No estimated tax penalty
Generally, you will not have to pay a penalty for 2005 if
any of the following situations applies.

*The total of your withholding and estimated tax payments was at least
as much as your 2004 tax (or 110% of your 2004 tax if your adjusted
gross income was more than $150,000, $75,000 if your 2005 filing status
is married filing separately), and you paid all required estimated tax
payments on time.
*The tax balance due on your return is no more than 10% of
your total 2005 tax, and you paid all required estimated tax
payments on time. *Your total 2005 tax (defined later) minus
your withholding is less than $1,000.
*You did not have a tax liability for 2004.
*You did not have any withholding taxes and your current
year tax less any household employment taxes is less than
$1,000.

Special rules apply if you are a farmer or fisherman.

Rudy
www.LizcanoTaxServicesLLC.com
 
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B

Benjamin Yazersky CPA

My 2005 tax liability is about $1,000.

During 2006, I expect to claim enormus long-term capital
gains, qualified dividends, etc. I have no earnings subject
to withholding.

Question: What do I need to pay for 2006 estimated taxes?

Two PAID CPAs give me two different answers:

CPA #1: I need to pay 110% of last year's tax liability
(preferably on a quarterly basis) to avoid underpayment
penalty.

CPA #2: I need to "pay as I go" using Form 2210.

Do I need to pay ten advisors and take an average? ;-)

Seriously, can anyone point me in the right direction? The
publications and instructions for all related forms appear
to conflict with one another... I just want to do this RIGHT
so that I don't overpay if I can avoid it.
Not sure if I agree with either answer.
Technically, I think that both of the above answers could be
correct in differing circumstances. I would suggest that you
read the instructions for form 2210 and see exactly how it
applies to your case.

One safe harbor would be to cover 100%/110% of the previous
year's tax liability, depending on AGI.

The other safe harbor is the pay as you go. If doing this
you only have to cover 90% of the current year's tax
liability. In some cases, I find it advantageous, in other
cases not.
 
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S

San Diego CPA

My 2005 tax liability is about $1,000.

During 2006, I expect to claim enormus long-term capital
gains, qualified dividends, etc. I have no earnings subject
to withholding.

Question: What do I need to pay for 2006 estimated taxes?

Two PAID CPAs give me two different answers:

CPA #1: I need to pay 110% of last year's tax liability
(preferably on a quarterly basis) to avoid underpayment
penalty.

CPA #2: I need to "pay as I go" using Form 2210.

Do I need to pay ten advisors and take an average? ;-)

Seriously, can anyone point me in the right direction? The
publications and instructions for all related forms appear
to conflict with one another... I just want to do this RIGHT
so that I don't overpay if I can avoid it.
You need to pay the lesser of:
a) 90% of your expected 2006 liability
b) 100% of your 2005 liability unless your 2005 AGI was >
150,000, then you'll need to pay 110% of 2005 liability

if your gains and other income are truly "enormous" and
received toward the end of the year rather than received
relatively evenly throughout the year, then there other
calculations available to you to reduce the earlier
estimtaed payments and shift the cash out-of-pocket cash
burden to later in the year.
 
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J

JMc

Two PAID CPAs give me two different answers:
CPA #1: I need to pay 110% of last year's tax liability
(preferably on a quarterly basis) to avoid underpayment
penalty.

CPA #2: I need to "pay as I go" using Form 2210.

Do I need to pay ten advisors and take an average? ;-)

Seriously, can anyone point me in the right direction? The
publications and instructions for all related forms appear
to conflict with one another... I just want to do this RIGHT
so that I don't overpay if I can avoid it.
They are both right. The 110% approach is the easiest
approach. You make 4 payments of 1/4 of 110% of your prior
year liability. Simple, but there are chances you would
overpay if you don't expect to have as much income in the
subsequent year. Your other approach would be to make sure
that you had 90% of your current liability paid in by the
end of the tax year (well, 15 days after the end of the tax
year). This would require more work on your part, but there
would be less of a chance you would overpay.
 
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G

Guest

This is total tax, line 63 of your 2005 1040, right?
I assume you expect your 2006 tax to be higher than 2005.
100% of your 2005 total tax (110% if 2005 AGI was $150,000
or more). The payment must be in four equal installments on
the 2006 ES tax due dates. (You can prepay if you like.)

IRS Publication 505 is the source. If you'd expand on what
you're finding confusing, perhaps we can clear it up for
you.

Hello Phil...

Thanks for your prompt reply. It's appreciated.

You are correct that Form 1040, Line 63 of my 2005 return is
$1,000.

I expect my 2006 AGI (and tax liability) to be huge... the
liability should be much higher than 1,000... I'm expecting
six-figures.

My AGI was under $150,000 for 2005. It will be much higher
than that in 2006. What I've found confusing is that I find
it hard to believe that I can produce such gains without the
IRS insisting that I pay the tax liability on those gains
quarterly, for the quarter in which they were realized. This
is a first for me, as my returns in the past have been
pretty straightforward. I've been told by one party that due
to the magnitude of the difference in gains between last
year and this year that I'll need to pay that liability as
it comes due quarterly, and the other party tells me that I
pay the minimum of the last year's liability or 90% of the
current year's liability. I'd prefer -- naturally -- to pay
the 100% of last year's liability (I'm planning on paying
more than 110% of it, for the heck of it).

The reason for my post is that I don't want an underpayment
penalty assessed because I failed to do the right thing (and
apparently one of the CPAs I've paid to advise me has to be
wrong).

If this information provides more information that can help,
I'd appreciate any follow-up information you could provide.
In the meantime, I'm going to carefully peruse Pub. 505 as
you suggested, as well as all worksheets on pages 33 through
42 of said document.

Again, thanking you in advance for any further guidance from
this additional information!

aax
 
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P

philsauer

First, thank you kindly for all of your responses. This
clarifies things a great deal. I didn't realize both CPAs
could be correct.

Secondly, I have no problem paying a large tax bill with my
2006 return. What I do NOT want to do is to pay them
anything until I absolutely have to, and with the amounts
involved I do not want to pay any penalties, as they would
be onerous. I WOULD PREFER that this capital do MY bidding
for as long as possible, not Uncle Sam's ;-)

So, I'll go with paying more than 110% (just to be safe) of
last year's tax liability over the four due dates for the
2006 Form 1040-ES... then pay the 2006 liability with my
2006 1040 filing in April of 2007. I do not expect this
situation to repeat itself (darn!) in the future, so I
should be okay with CPA #1's advice.

Again, if any of you should have a follow up, in light of
what I just added, please correct me.

Many thanks for the sanity check! (Oh, just curious... is
anyone here in Texas?)

aax.
 
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E

ed

Dennis: It's redundant for this OP but paying down to under
$1,000 doesn't work unless its done only with Withholding.

Also, to the OP: If you do NOTHING the penalty will be
less than $50.

ed
 
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E

ed

Bottom line: Pay 1/4 of last year's tax with 1040ES voucher
and you will have no penalty. This is not rocket science.
See first page of IRS form 2210.

NEXT YEAR it IS rocket science. You won't want to pay 1/4
of this year's tax each quarter, so you have to compute your
quarterlies on the Annualized Income Method. Find a
computer program to calculate this at
www.edcosoft.com/qitc.html (and a deep discussion of the
entirte subject) , however if you can easily compute your
full annual tax by April 15 of the current year pay 1/4 of
90% of that. Watch out, though, if you get a big hunk in
next year like you did this you'll have to revert to the AI
Method.

ed
 
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R

rick++

Both CPAs are correct.
If your gain is at the beginning of this year, you may want
to use the equal quarter method to for a slower way to pay
taxes. If your gain is at the end of the year (typical
with mutual funds) then you want to use the per-quarter
method to slow down tax payments. You may make a few extra
bucks delaying taxes.
 
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B

Brian

(e-mail address removed) wrote:
(Oh, just curious... is anyone here in Texas?)

I'm in San Antonio.
 
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H

hlunsford

LTSLLC said:
"(Oh, just curious... is anyone here in Texas?)"

I'm in McAllen in South Texas near the border.
We are ALL "deep in the heart... of Taxes!"

Oh, you said "Texas." my mistake.

Sunday morning ChEAr$,
Harlan Lunsford, EA n LA
 
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