Avoid an Estimate Penalty
As we near the end of the first quarter of the year, it might be a good time to remind your clients about their estimated tax payment requirements to avoid an estimate penalty. If your client fails to make the required estimate payments, pays an installment after the date it is due, or underpays any installment, they may be assessed a penalty on the portion of estimated tax that was underpaid from the due date of the installment to the date of payment or the due date of their tax return, whichever is earlier.
When figuring their required estimated tax payments, generally taxpayers must pay the lesser of 100 percent of last year's tax or 90 percent of your current year's tax (with some exceptions). However, there is a limit on the use of prior year’s tax for high income individuals. They must base their estimate tax payments on the following applicable percentages.
If their adjusted gross income is more than $150,000 ($75,000 if married filing a separate return) in the prior tax year:
- The required payment is the lesser of 90 percent of their tax for 2012 (current year) or 110 percent of their tax for 2011 (prior year).
If their adjusted gross income is $1 million or more ($500,000 if married filing a separate return) in the current tax year:
- The required payment is 90 percent of their tax for 2012 (use current year only).
Different estimate payment rules apply to farmers or fishermen.
To avoid an estimate penalty, taxpayers must pay at least 30 percent in the first quarter, 40 percent in the second quarter, 0 percent in the third quarter, and 30 percent in the fourth quarter.
Installments payments are due by:
First payment (30 percent). . . . . April 17, 2012
Second payment (40 percent). . . . June 15, 2012
Third payment (0 percent). . . . . September 17, 2012
Fourth payment (30 percent). . . . January 15, 2013
Taxpayers should use the California Estimated Tax Worksheet in the Instructions for Form 540-ES, Estimated Tax for Individuals (540ES Form Instructions) to figure their estimated tax payments.
To make the estimated tax installment payment, they must use Form 540-ES.