Is it necessary to file an Estimated Tax Return?

Estimated Income Tax method is used in cases where you have income the does not require withholdings. This would include income from dividends, rent, alimony, interest, self-employment, gains on the sale of assets, prizes, and awards. Another reason that you might have to pay the estimated income tax would be if the amount of tax being withheld from your pension, salary, or other income is not sufficient.

Who has to pay the Estimated Tax?
Anyone who had a tax liability for 2005 may have to pay the estimated tax in 2006.

Below are a few common rules that you can follow: Check to see if these apply to you.

1. After subtracting your withholdings and credits for 2006, you still think you will owe at least $1000.
2. You think your withholdings and credits will be less than the smaller of;
a. 90% of the tax to be shown on your tax return for 2006
b. 100% of the tax to be shown on your 2005 return, where your tax return covers all 12 months.

One way to avoid the estimated income tax, is by simply asking your employer to take out more taxes out of your earnings if you earn a salary or wage. You also can avoid having to pay the estimated tax in 2006 if you meet these three requirements.

1. You do not have a tax liability for 2005
2. You remained a US citizen for the entire year.
3. Your taxes for 2005 covered a period of 12 months.

You do not have to file an income tax return if in 2005 had no tax liability and had total taxes of zero.

Different professions have different tax requirements. For example, for farmers and fishermen tax requirements are different. You can refer to Publication 505, (Tax Withholding and Estimated Tax), for more information on these special tax rules.

Figuring out your Estimated Tax

To work out your estimated tax, you have to calculate your expected adjusted gross income, taxes, taxable income, credits and deductions for the year. When trying to figure out your 2006 estimated tax, you might want to start with your income, credits, and deductions from 2005 as a starting point. You can use your 2005 federal tax return as a resource. The Form 1040-ES can be used to help you figure out your estimated tax. Don’t forget to make adjustment for any changes in your situation or current changes in the tax law.

Copyright 2006 Sam Kern- All Rights Reserved

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