Tax - Estimated Tax Safe Harbor Deposit Requirement for Higher Incomes

When we avail reduced payroll tax, our take home pay is increased and we are happy. But one danger is that some of us may not be aware that our reduced tax withholding may have created an estimated tax payment liability.

Most of the time we need not remember the fact that the U.S. federal income tax is a pay-as-you-earn system. That is because the headaches of the necessary administrative procedures may be borne by the employers' payroll departments.

So, the answer to the question whether the filer wants the tax refund to be applied to next year's tax is generally "No" on the tax return.

Also, taxes are withheld in advance from pensions, bonuses, commissions, and gambling or lottery winnings at the source without much hassle for the recipient.

But it becomes the responsibility of the recipient when taxes are not withheld at source from incomes including capital gains, rent, and royalties.

That is also the case for those engaged in self-employment or those owning a business.

If you don't pay enough tax in advance, either through at-source withholding or through estimated tax payments, then you become liable to pay an underpayment penalty.

The underpayment penalty can be avoided by making safe harbor deposits in advance.
The income threshold for such deposits for the 2010 tax are as follow:

(1) when your adjusted gross income (AGI) for tax year 2010 was more than $75000
in the case of single filers or those whose are married but filing separate returns

OR

(2) when your adjusted gross income for tax year 2010 was more than $150,000
in the case of married filing jointly.

In both cases, to avoid an estimated penalty in the next tax season,
you must deposit the SMALLER of these following two amounts:

A. 90% of your "expected tax" for this year (2011)

OR

B. 110% of the tax shown on your last year's (2010) return you are filing now.

EXCEPTIONS

If taxes were not withheld, you do not have to pay a penalty in the following two situations:

- You did not have any withholding taxes and your current year tax after deducting any household employment taxes is less than $1,000.

- You did not have a tax liability for 2009 and your 2009 tax year was 12 months.

If taxes were paid in advance through withholding at source or by estimated tax payments, you do not have to pay a penalty in the following two situations:

- Your total 2010 tax after deducting your advance withholding and refundable credits is less than $1,000.

- If you paid all required estimated tax payments on time and the balance due to the IRS on your 2010 return is no more than 10% of your total 2010 tax.

PLEASE NOTE: This is just an introductory treatment of the subject. For the latest, detailed information, always consult resources provided by the Internal Revenue Service (IRS).