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Second Quarter Estimated Tax Payment Due- June 15

If you are required to pay quarterly estimated tax payments to the IRS or state, your second payment is due on or before June 15, 2016.

If you are not sure about your need to pay in quarterly tax estimates for the current year, here is some more information.

All taxpayers must pay a “required annual payment” to the IRS as their income is earned.   This payment in total is equal to the lesser of 90% of tax shown on their current year return, or 100% of tax shown on their prior year return.  (Taxpayers with an adjusted gross income of greater than $150,000 must pay the lesser of 90% of tax shown on their current year return, or 110% of tax shown on their prior year return). It is due in 25% installments by Apr. 15, June 15, Sept 15, and Jan 15, to avoid underpayment penalties.

Most taxpayers receiving the majority of their income through wages will satisfy these requirements through tax withheld on their paycheck by their employers.  However taxpayers involved in flow through entities such as sole proprietorships, partnerships, S corporations, or trusts and estates need to be proactive in paying these installments in full and in a timely manner.

Failure to make these required payments may result in underpayment penalties.  The penalty is the interest rate charged by the IRS (currently an approx 3.52%), multiplied by the amount underpaid.

Penalties can be avoided if you meet specific exemptions:

The first exception to avoid penalties is Small Balance Due.  If the tax due after reducing federal withholding is less than $1,000 then no penalty will be incurred.

A taxpayer will avoid a penalty with the second exception if there was no tax liability in the prior year.

The third exception to the penalty is if the taxpayer paid, through withholding and estimated tax payments, 100% of their prior year tax liability (110% for those with an AGI above $150,000).

The fourth exception would be to pay, through withholding and estimated tax payments, 90% of the current tax liability.  This would be most commonly done with a tax projection and making estimated tax payments based on the projected liability.

For taxpayers who do not receive their income evenly throughout the year, an annualization option is available.  This would most commonly affect taxpayers with businesses of a seasonal nature.  An annualization exception comprises of a calculation to determine what estimated tax is due by quarter based on income as earned. The calculation will still compute the total amount to be the same as the lesser of 90% of tax shown on their current year return, or 100% of tax shown on their prior year return in a more reasonable distribution.  Taxpayers that think this might apply should consult their tax preparer to calculate the appropriate payment per quarter.

Do not forget that the same rules apply to the Minnesota Department of Revenue for your state tax liability.

It is important that taxpayers make their payments to both the IRS and Minnesota Department of Revenue in full and on time.  An overpayment in a later quarter does not eliminate underpayment penalties for previous quarters.  Penalties are computed from the date the quarterly payment was due until it is paid.

If you are unsure whether or not you need to make estimated tax payments or what amount you should pay, please contact your tax advisor.

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