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You can help plan for the 2007 tax year by estimating and paying your taxes quarterly. You would use Form 1040ES for this. By paying your taxes on a quarterly basis, you will not have a huge year-end tax bill due. In other words, estimated tax payments can be a very beneficial budgeting tool.
Estimated taxes need to be paid to the IRS when you either 1) do not enough withholding being taken out of your paycheck, or 2) you had over $1,000 of income where taxes were not withheld. The most common sources of income where taxes are not withheld include: self-employment income, alimony, and interest and dividends.
It is usually safe to say that if you had a tax liability in 2006, you may benefit from making estimated income tax payments in 2007. On the average, you can usually estimate your 2007 taxes by using your 2006 tax figures. This applies only if you have not had any wide fluctuations in your financial situation, though.
Be certain that your estimated payment amounts are not too large or too small, however, or the IRS will assess you a penalty.
Do not concern yourself with estimated tax payments for 2007 if during 2006 you had no tax liability or you did not need to file a 2006 income tax return.
A great tool to use to calculate if the correct withholding amount is being deducted from your paycheck is found in the Withholding Calculator. One of these calculators is found on the H&R Block website. There is also one found on the IRS website. The Withholding Calculator can also help you with estimating your taxes.
|Sheri Ann Richerson|