Yup. It’s one tax break that you don’t have to be a hedge fund
manager to use. Most people don’t understand how estimated taxes work and work themselves into a tizzy thinking they are more complicated than they really are. It’s a shame, because they really aren’t. Here is a primer on estimated taxes. It’s written for investors, but it really applies to anybody who has income from which taxes are not withheld. Its only short coming is that it does not deal with the Annualized Installment method (which really IS complicated).
Yup.
That is an excellent question. You basically have to estimate how much you are going to make this year and what kind of deductions you’ll be able to take. You can, of course, adjust your estimates as the year goes forward. The taxes and forms for 2012 will pretty much be the same as the ones for 2011 with some minor adjustments for inflation (unless Congress radically changes the tax laws this year). One way of doing it is to use the 2011 forms and figures, but plug in your estimates for 2012 income and deductions and see what comes out. You’ll probably be very close. There are also some online tax calculators if you search the web that might help.
If you really want to pay more tax than the required minimum, they will gladly accept it. They won’t pay any interest or award you a commendation for doing so. When you file your 2012 Form 1040, you will write the amount you paid on line 63 and subtract it from the amount you owe for 2012. If it turns out you paid more than you owe, you will get a refund. But you cannot get a refund of your estimated tax payments before you file your 2012 return.
The EITC is a refundable credit. That means that it is not limited by the amount of tax you owe. Because of the EITC, some people get back more than they paid.
It will not change the amount of your self-employment tax, but you can deduct the $70 or so credit from the amount you owe, meaning you’ll only have to send a check for $50 instead of $120.
Sorry, neither your health insurance nor your car donation are going to change your taxes in any way. You can be proud of yourself for helping a worthy cause, but you won’t get any tax benefit for your trouble. You should have waited until a year when you had some taxable income.
I don’t think it’s worth buying 2011 tax software. When you add the $109, you’ll almost be doubling what you spend on taxes this year. But I am pretty good with a pencil, tax form, and calculator.
But if you do decide to do it, get the kind of tax software that you download and run on your own computer. Don’t use the kind where you go to a web site and fill in the values there. The reason for this is that the kind of software that you download to your computer lets you do as many tax returns as you want, whenever you want. So you could, for example, start up a new tax return with a fake name and number and put in your 2012 estimated income as if it were 2011 income and let the software calculate how much tax you owe. You could do as many fake returns as you like in order to try out different combinations of numbers. (Just don’t try to file the fake returns!) The tax web sites won’t let you do this.
(Why does my spellchecker say “combinations” is spelled wrong?)
I am self employed and use TaxAct Deluxe, the download version. Last year I used TaxAct then went to the accountant and she did everything exactly the same. The only place where TaxAct hasn’t worked great, but worked OK, for me is figuring out what happens between two states. Federal interaction with one state has been fine.
I wasn’t going to mention this earlier since I had assumed that someone making $1000 a year would be really short on cash (shame on me!), but now that you mentioned that you might want to overpay your estimated tax, I’d like to suggest something you could do with the money instead:
Make a Roth IRA contribution for 2011. You have until April 17, 2012 to do this. You must explicitly tell the bank or broker that the contribution is for 2011 and NOT for 2012.
You can contribute up to the amount on your Form 1040 line 12 minus line 27. It won’t change your taxes, but it’s a chance to save tax-free for retirement. There are more sophisticated investment products, but Ally Bank has no minimum deposit, no fee IRA accounts that will get you started.
I haven’t made quarterly estimated payments in quite a while, and maybe rules have changed, but: your estimate has to be within certain limits of what your tax due will be: 10%? or some amount. I don’t remember anything about not being required if you owe less than $1000. And if you do start making real money, IRS will expect that to be accounted for in the estimates. I may be wrong, but I don’t see any reasons to expect penalties to be less, just because interest rates in general are small. There must be some way you could get some free advice. And next year start your taxes in February!
The penalty for underpayment of estimated taxes is based on the federal short term interest rate plus 3 percentage points.
The penalty rate for the first quarter of 2012 is announced in Revenue Ruling 2011-32. The historical rates are in the table that starts on page 8. You’ll find that the rate for the first quarter of 2012 is an annualized 3%.
As to the rest of your post, it’s an example of what I said earlier about confusion about how estimated taxes work. Here is the actual copy of the text of the law.
Refer specifically to subsection (d):
Subparagraph (C) is really long so I’ll paraphrase it (but you can go there and read the original): If the previous year’s tax exceeds $150,000, use 110% of the previous year’s tax instead of 100%.
The $1000 exception is in subsection (e):
“Credit allowable under section 31” refers to income tax withholding from wages and other payments. It does not include estimated tax payments.