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Estimated Payments Update

We recently sent this information as a Tax News Flash for our subscribers

As the result of legislation enacted last year, there is a new California estimate payment requirement beginning on or after January 1, 2009. This new law changed the percentage amount for estimated tax installment payments from four equal installments of 25 percent of the required annual amount to installments of 30 percent of the required annual amount for each of the first two installments and 20 percent of the required annual amount for the last two installments. The new law did not change withholding requirements, therefore, wage earners do not need to change their withholding to address the change to the percentage amount for estimated tax installment payments, so long as the total amount of tax owed with the return for 2009 or 2008, after being reduced by credits and taxes withheld for the applicable year, is less than $500 ($250 in the case of a married individual filing separately). This $500 threshold was increased this year.  In previous years the threshold was $200.

Unlike an estimated tax installment payment, which must be paid in an amount required by the law to avoid an underpayment penalty for a particular installment, taxes on wages do not need to meet the percentages for estimated tax installment payments to avoid the penalty for underpayment of estimated taxes. Taxes withheld on wages can vary substantially over the year and withholding can be increased at anytime during the year to meet the less-than-$500-owed threshold and avoid the penalty. If, however, taxes withheld for a taxable year and credits for a taxable year do not reduce taxes owed to less than $500 for the current year or the prior year, then a taxpayer may need to make estimate payments, paid in the required installments, to avoid the penalty for underpayment of estimated tax.

We received several questions and comments about this newsflash, here are a few of the questions and their answers to help clarify this legislation further:

Q. How is withholding from pensions treated?  Is it the same as wage withholding or will withholding have to be adjusted throughout the year to meet the estimated payment acceleration requirements?

A. Pension withholding is treated the same as wage withholding for purposes of the estimated tax penalty exception computations.

Q. Withholding is, by default, considered paid evenly all year regardless of when it was actually withheld. Will the new penalty computation assume that the withholding occurred the same as estimated payments: 30/30/20/20?

A. No, we will not consider withholding paid at 30/30/20/20. So a taxpayer who has withholding AND pays estimated tax should “make up” the 30% in the first two payments, taking into account only 25% of the expected withholding for each of those payments. In addition, since we continue to assume that withholding was paid 25/25/25/25 a penalty may be assessed if a taxpayer pays taxes through withholding but does not meet one of the exceptions.

Q. Can I apply my client’s refund as an estimated payment toward my 2009 taxes?

A. Yes, if on your client’s 2008 return you request that their refund be applied toward your 2009 taxes, we will apply the amount you designate when we process their return.

Q. In the event of a one-time distribution, for instance from an IRA, can we assume that if an amount adequate to cover the tax on that income is withheld at the time of the distribution, it would be considered timely?

A. Yes. Depending on when the distribution occurs during the year, the taxpayer might need to use the annualization exception to ensure that the any penalty computation takes into account the uneven receipt of income during the year.