I am about to receive a one-time lump sum payment from a former employer- it’s not a huge amount but will pay off some debts and hopefully give me a little breathing room. However, since it is untaxed but will count as taxable income, and since interest rates are negligible at the moment, I would like to go ahead and pay my share of taxes on it (which I guesstimate using tax tables and what my income will be including this amount will be about $3,500 above what is witheld from my paycheck) to the IRS so that I don’t have that money sitting in my account deluding me into thinking I have more than I actually do.
I know that business owners pay taxes on projected earnings, but can anybody else go ahead and pay ahead in a situation like this?
PS- Getting what is to me a fairly sizable chunk of change and having to turn $3,500 of it over to the government sucks so much that I can almost for a moment understand Republicans. It’s irritating when I think “There’s a trip to Europe in that money…”
You can make a single “quarterly” payment if you like.
And there’s scant need for an accountant - just get a copy of the 1040-ES (“Estimated Tax for Individuals” - available at www.irs.gov) form, fill it out (it’s dead simple) and send it in with your check.
Another alternative is to just use Turbo Tax or another web-based tax program, but not print out the return and just use the calculator part to figure out what you should pay.
In fact, a windfall that would carry a $3,500 tax liablity could require you to make a quarterly payment.
The IRS claims the form 2210 (Underpayment of Estimated Tax…) is “complicated”, so I won’t try to figure it out right now, but instructions for the 1040 state you will owe a penalty if:
Line 74 is the “amount you owe” at the end of the return.
If you pay early, the money is an interest free loan to the gov’t for a year. Whereas a 1-year CD not only ties up the cash for a year so you can’t spend it anyway (and either way you don’t have access to it), but you earn interest on it. Taxable, of course, but you’ll still come out ahead.
It’s the main reason the super wealthy pay the absolute minimum during the year, then write a check the next for what’s owed. Just remember, withholding tax is an interest-free loan you’re making to the Treasury.
Not a stupid question- I think that’s what I’ll do. (The interest would only be about $100, but I’ve sure as hell never seen the day that I’d wouldn’t stoop down to pick up a $100 bill, plus I can add it to my “see Europe” fund.)
Be sure to give Form 2210 a quick glance. My cursory reading of it seems to indicate that you might be liable for a 3.184% penalty on that $3,500 tax if you don’t pay it sometime during the year. Last I checked, no banks in my area were offering 12-mo CDs returing this kind of rate.
It’s irritating when I think “There’s a trip to Europe in that money…”