How to Calculate Quarterly Estimated Taxes

Individuals who earn income in the United States and are not subject to income tax withholding are required to pay estimated taxes quarterly to the Internal Revenue Service (IRS). Failure to pay or underpaying these taxes will result in assessment of tax penalties and may subject the tax payer to an IRS audit. The procedure for calculating the required estimated tax is simple and if followed will help the taxpayer meet IRS requirements and avoid the possibility of a tax penalty assessment.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• A copy of the previous year's tax return
• A table of tax rate schedules for the current tax year

1. Refer to the previous year's tax return and record your Adjusted Gross Income (AGI) from last year.

2. Add any anticipated additional income for the new (estimated) tax year to the previous year's AGI.
   If income is anticipated to be less than that of the previous year, subtract that amount from the previous year's AGI.

3. Review the itemized list and amounts of deductions made in the previous year and add or subtract anticipated changes in deductions for the upcoming tax year. This will be your estimated total deductions for the new tax year.

4. If you do not itemize deductions or if you have deductions amounting to less than the Standard Deduction, use the latter. The current Standard Deductions for 2009 are: $5,450 for a single taxpayer, $8,000 for a head of the household and $10,900 for married couples filing jointly.

5. Subtract either the amount shown in step 2 or step 3 (whichever is appropriate for your situation) from the AGI amount shown in step 2.

6. Multiply the number of personal exemptions by $3,650 and subtract this total from the amount shown in step 4.
   Note that individual incomes exceeding the allowed threshold amount must reduce the personal exemption ($3,650) by 2 percent for every $2,500 of income above the threshold amount. Threshold amounts are:
   Single taxpayers - $166,800
   Married filing jointly - $250,200
   Married filing individually - $125,100
   Head of household - $208,500

7. Calculate the annual tax payment required using either tax tables Schedule X (for single taxpayers), Schedule Z (for head of household), Schedule Y (for married couples filing jointly) or Schedule Y-Z (for married persons filing separately).

8. Subtract from the amount shown in step 6 any tax credits (such as tax refunds deferred from the previous year and credited to the current year) to obtain estimated tax due.

9. Adjust the tax amount calculated in step 8 by multiplying it by 90 percent. You will have the option of paying estimated taxes based on 90 percent of the amount shown in step 7 or 110 percent of the tax paid on your previous year's return, whichever is lower.

10. Divide the annual amount calculated in step 8 by four. This will be the estimated tax payment due quarterly and to be paid by April 15, June 15, September 15 and January 15 of the following year.

Tips & Warnings

• Always use the previous year's tax return as a beginning reference. Check the IRS.gov website to ensure that the tax rates and personal exemption amounts used are up to date for the current year as these change frequently. Note: The Standard Deduction and Personal Exemption amounts shown above are current for tax year 2009 only.
• Take care to estimate income and resulting taxes accurately as underpayment can result in a tax penalty.

References

• Tax Tips
• Internal Revenue Service