Tax planning and compliance for investors
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Some people prefer to make estimated tax payments even when they aren't required.
Depending on your situation, the amount of estimated tax you're required to pay could be quite a bit less than your true estimate of the amount of tax you'll owe. That's because you're allowed to pay estimates based on the previous year's tax, even if you know this year's tax will be higher. When that happens, you have a choice. You can pay the minimum amount required — and pay the rest on April 15. Or you can pay something close to the true estimate so you won't owe a lot on April 15. Which is better depends on your comfort level and money management skills.
Some people choose to make estimated payments even when the payments aren't required. The reason? Perhaps they're concerned that the money won't be there when they need it to pay taxes. Perhaps they're simply more comfortable knowing that they won't have a huge tax bill in April. There are a variety of good reasons to make estimated tax payments even if the payments aren't legally required. The biggest one is peace of mind.
The main reason not to pay more than you have to is that you lose the use of your money between the time you pay the estimate and the time you would have sent payment with your return. You should be able to earn at least a little bit of interest during that time. So there's at least one good reason to pay later, even though there are good reasons to pay sooner.
Which approach is better — making voluntary payments, or paying the minimum — depends on your personality and your circumstances. Consider the following example:
Example: You normally don't pay estimates because almost all of your income is from wages subject to withholding. In January 2005 you sell stock and have a capital gain of $30,000. You expect to owe $6,000 as a result of this gain. But you don't have to pay estimates because your 2005 withholding will be at least equal to your 2004 tax.
You have several choices, including the following:
There's nothing illegal or immoral about any of these approaches. They're all equally acceptable to the IRS. If you find yourself in this situation, you need to make your own decision as to the approach that works best for you.
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