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Who Must Pay Estimated Tax?

Now you know what estimated tax is, let's discuss who must pay estimated tax to keep the IRS happy and the taxpayer penalty free. First of all, if you never paid estimated tax, don't panic. Some taxpayers are not required to pay estimated tax.

Who must pay estimated tax?

If a taxpayer owes taxes in the previous tax year, then the taxpayer may have to pay estimated tax this year if both rules are satisfied.

  1. the taxpayer expects to owe at least $1,000 in tax for the current tax year after subtracting withholding and credits

     

  2. the taxpayer expects his or her withholding and credits to be less than the smaller of:

 

  • 90% of the tax to be shown on this year's current tax return, or

     

  • 100% of the tax shown in the previous year's tax return for the whole 12 months.
I did not owe any taxes last year, do I have to pay estimated tax?

If you did not owe the IRS any tax last year and you are a US citizen or US resident for the whole year, plus your last tax year was for the whole 12 months, then you don't have to pay estimated tax.

Example of the general rules to determine who must pay estimated tax

If the taxpayer has tax liability in the tax year 2007 (for no tax liability in 2007 see above) then if:

  • you think you will owe at least $1,000 in tax for 2008 after all the withholding and credits or
  • you expect that your withholding and credits are less than the minimum of 90% of tax shown on the 2008 tax return or 100% of the tax shown in the 2007 tax year (12 months)

Then you will have to pay estimated tax.

Who Must Pay Estimated Tax

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