What are advance taxes?

These are tax payments, which are made before they are actually due. You should be aware that federal income tax returns are normally due April 15 every year, but the Internal Revenue Service (IRS) has made it a requirement that advance tax payments should be estimated and then paid at least quarterly. If you are an employee, the advance tax will be taken from your paycheck. If you happen to get some income from other sources that you don’t have to withhold, you have to pay the advance taxes yourself. Married couples will need to file jointly therefore the estimate needs to be based on the joint income of both people.

Who needs to pay advanced tax payments?

The estimated tax rules apply to:

  • U.S. citizens and resident aliens
  • Residents of Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa
  • Non-resident aliens

The general rule is that you must pay estimated tax if you expect to owe at least $1,000 (after having subtracted your withholding and refundable credits) and you expect your withholding and refundable credits to be less than the smaller of either 90% of the tax declared on this year’s tax return or 100% of the tax displayed on last year’s tax return. The percentages aren’t set in stone so make sure to look at the Special Rules regarding advance tax payment that IRS provide on their website (explained on the Form 1040-ES link below).

Some exceptions mean that not everyone has to pay advance tax. This includes if you were a U.S. citizen or resident alien for all of the previous year and had no tax liability for the full 12 months of the previous tax year, or you had no tax liability for the previous year if your total tax was zero, or you didn’t have to file an income tax return.

How to estimate your advance tax payment

Firstly, estimate your yearly income from anything subject to withholding then add taxable income from anything that isn’t subject to withholding i.e. anything from self-employment, interest, alimony, rent, etc. Any income that is exempt from tax should not be included.

It’s a good idea to use your tax return from the previous year as a guide. By subtracting the exemptions, adjustments, and deductions from your estimated gross income, you will end up with your estimated taxable income. Tax tables provided by the IRS will help you to figure out your estimated total income tax liability for the year. In order to calculate your net tax liability, you should subtract any tax credits as well as your estimated tax withholding for the year from the total income tax liability.

Estimated advance tax payments must then be made if your net tax liability after credits and withholding exceeds 10 percent of your total tax liability and is greater than $1,000. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. Don’t forget to divide your net tax liability by four so you have the quarterly amount. This amount is then due on April 15, June 15, September 15, and January 15 of the next year. Make sure to amend the estimated tax payment if your amount of income should change.

In order to make your advance tax payment, you can print off the 1040-ES form payment voucher from the IRS website along with a check or money order. It’s also possible to pay by direct electronic transfer, or over the phone or internet with a debit or credit card.

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