April 17th Is Coming! How I Estimated My Tax Liability For Tax Extension Form 4868
Please don’t take the following as tax advice. It’s what I did, not necessarily what others should do.
I’m filing Form 4868 for an automatic extension of time to file my tax return. But that doesn’t give me any extra time to pay any taxes owed, so I must estimate my tax liability and send that in. Specifically, I must pay at least 90% of my total tax due by April 17th in order to avoid penalties for late payment. However, you will still be liable for any interest accrued on any balance due when you file your return. Either way, it’s good to overestimate a bit and make sure it’s all paid off. Here are my quick and dirty calculations:
Estimating total taxable income. I added up all the income from our W-2s, 1099-MISCs, 1099-INT, 1099-DIV, capital gains, and other gross business receipts to get our gross income. I took out our 401(k) contributions and a few of the larger business expenses that I have documentation for. Other may need to take into account other items that make up their adjusted gross income (AGI).
Instead of worrying about itemized deductions, I just subtracted out the personal exemption of $3,300 per taxpayer and the standard deduction ($5,150 for Single, $10,300 for Married Filing Joint) from my estimated AGI. This leaves me with my estimated taxable income.
Estimating tax liability. You can either use the tax tables starting page 66 of the 1040 instructions, or use the tax schedules shown here. They both give you the same numbers. This estimated tax liability goes into Line 4 of Form 4868.
Finding out what taxes you’ve already paid. For us, this consisted of the tax withheld from our W-2s and the estimated quarterly payments I made for the business. These payments go on Line 5 of Form 4868.
Finally, logically we end up with Taxes Still Owed = Tax Liability - Taxes Paid. You can then either:
- Write a check for this amount payable to the “United States Treasury” and mail the form in at the cost of a stamp,
- or sign up for an account at TaxAct and e-file Form 4868 for free. I chose this option as it lets me withdraw money electronically from my savings account. Also, this way I can get an e-file confirmation in a few days instead of hoping the Postal service doesn’t lose my check. You don’t have to do your taxes or anything else at TaxAct if you don’t want to.
If you don’t owe anything, you still should file the form. I just e-filed my extension. Woohoo! Now I can procrastinate for another 6 months…
April 14th, 2007 at 11:09 pm
>Specifically, I must pay at least 90% of my total tax due by April 17th in order to avoid penalties for late payment.
Actually, you have to pay 100% of your total tax due by April 17th in order to avoid penalties for late payment. The 90% is what you are required to pay in via withholding and estimated quarterly payments to avoid an underpayment penalty for not paying enough estimated taxes (unless you qualify for the safe harbor amount).
April 14th, 2007 at 11:25 pm
This is how I understand it works, taken from another resource which I can’t find right now:
“You have to pay interest on any 2006 tax not paid by April 17, 2007, even if you obtain a filing extension. In addition, if the tax paid with Form 4868, plus withholdings and estimated tax payments for 2006, is less than 90% of the total amount due, you will be subject to a late-payment penalty (usually one-half of 1% of the unpaid tax per month)???unless you can show reasonable cause.”
I forgot to add one sentence to the post originally - “However, you will still be liable for any interest accrued on any balance due when you file your return.”
Again, I’m not an accountant, so you may be right. But I think this makes sense because if you pay at least 90% it shows you made a “good-faith” estimate of your tax liability. If you don’t pay up the rest by October 15th, then yes, you’ll definitely be hit with late-payment penalties.
April 14th, 2007 at 11:37 pm
I just found this paragraph at the very beginning of page 3 of Form 4868:
April 15th, 2007 at 7:20 am
If you did all that work to prepare your extension, why not just complete your taxes? With the time you spent compiling all this information for your extension you could have been 3/4 done with your tax return!
Or, you pay someone at Liberty Tax Service to do your return in 45 minutes and pay a couple bucks for professional service (I’m biased because I own a Liberty Tax Service franchise ;0).
But, the truth remains that you could have been more than half way through completing your return already!
April 15th, 2007 at 7:40 am
Huge fan of the site Jonathan but I have to agree with David - you seem like a person that takes hours a day working on various projects i.e. the multiple posts about the buy vs rent calc must have taken more time than actually doing your taxes (this doesn’t mention the time taken to do the parts of your taxes you completed).
Just curious why not do one less post and do your taxes!? You are no use to us, the faithful readers, if you go to jail for messing with the IRS
LOL
April 15th, 2007 at 8:47 am
In defense of Jonathon, isn’t there a saying about why Professors teach and don’t work in the field that they teach?!
April 15th, 2007 at 10:07 am
Shrug, here’s my honest answer. I underwithheld my taxes by well over $10,000 this year (all without penalty), which netted me a few hundred dollars in extra interest. I had planned to file near the deadline, thus maximizing my interest.
But life happened. For example, I have been out of town for the last week on a family event. I’m away this week as well. I can easily blog on the road, but not so much with doing taxes.
I could have done my taxes earlier, sure, but what’s the harm in putting it off for a week until after the April 17th rush? It cost me essentially nothing. Don’t worry, I’m not waiting until October 15th
April 15th, 2007 at 10:19 am
Yeah but… why wait until the last minute? Even if you owe taxes, you can file and wait until the deadline to actually pay it. By the time April rolls around I have done at least a couple dry runs through Turbo Tax before actually committing to a final run. That way I can gauge when I will need all the various pots-o-money for any taxes due, estimated Q1, and biannual county property taxes, all of which land in April (ouch!).
PS. Don’t forget you still have to pay 2007 Q1 Estimated before the 17th!
April 15th, 2007 at 10:24 am
If you’re looking for a better answer than “I didn’t want to sort through all my business receipts and measure my room for the home office deduction until April”, then you’re going to be disappointed. I like making money, not paying taxes
April 16th, 2007 at 6:47 am
I used to do my taxes myself, but my accountant is SO MUCH BETTER at getting deductions for me — I save more than double what he charges at the very least — This year he saved me $1000. I pre-calculate and take all the deductions that I can think of — but I don’t come close to what he gets. I think it really pays to go with an expert with your taxes. You can always wait with the forms and mail and pay at the last minute. I really used to think I was saving money doing it myself (half of my family are accountants, so doing the taxes kind of comes naturally ;>), but I really missed out not using my accountant sooner. They are totally great and they sign the return with me — so the IRS can contact them with any questions. I feel so much safer and smarter going with a professional. It’s one of those things that I feel is TOTALLY WORTH IT.
April 16th, 2007 at 11:30 am
Jonathan said: “I like making money, not paying taxes :P”
I concur!!
In fact I would much rather work extra at what I do, so that I can afford to PAY someone else to do my taxes! Now I just have to ask myself, “Why haven’t you outsourced this yet!!” The only answer I can muster at this time is, “I have no response to that…”
BTW, does anyone know a good accountant??
April 16th, 2007 at 4:51 pm
One last thing to remember is that even if you file an extension to file your taxes you still accrue interest on whatever balance you end up owing the government from April 17th.
The interest rate for late payments is currently 8%
http://www.irs.gov/newsroom/ar.....52,00.html
Good luck!
April 14th, 2008 at 7:34 pm
Oh my gosh..thanks so much for this explanation. I procrastinated and do not understand a thing about taxes and just went to Hewit Jackson today to find it would cost me over $250 to file for my 5 forms. So they told me to file for an extension and then I can go to my other acocuntant that is further but less money.
So I held on the phone with the IRS for 1 hr and finally gave up to search the internet and found your great info.
Thanks again for this so I can finally file~!!!