liberty tax service online basic income tax course. lesson 18

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Liberty Tax Service Online Liberty Tax Service Online Basic Income Tax Course.Basic Income Tax Course.

Lesson 18 Lesson 18

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Chapter 17 HomeworkChapter 17 Homework

HOMEWORK 1: Prepare the tax return based on the following information:

Ace R. Venture III (SSN 154-22-2111, born 1/15/1959) is single and owns a detective agency called Precious Pet Police. The business code for his business is 561600. He uses the cash method of accounting. Ace lives at 125 Carey Drive, Newark, NJ 07195. He lives in, and works out of an apartment for which he pays rent (including utilities) of $600 per month. He uses two of his five rooms in theapartment for his business. His EIN is 22-2345678. He has no income other than his self-employment income.

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Chapter 17 HomeworkChapter 17 HomeworkHe paid $1,000 in each quarter for estimated taxes

(entered on Form 1040 line 63).

He has written records for his business mileage and has only one car.

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Chapter 17 HomeworkChapter 17 HomeworkThe information from his business is:

Inventory NoneGross receipts $75,000Advertising 5,175Telephone (separate line) 75 per monthOffice supplies 1,200Travel (airfare, lodging) 27,800Meals while traveling 4,780Licenses 250Costume rental 4,500Auto: (placed in service on 21,000 total miles1/2/2008) 9,500 business miles (5,000

in the first half of the year)

Insurance 5,600Supplies 3,280Medical insurance 254 per month x 12

months(established under hisbusiness)

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Chapter 17 HomeworkChapter 17 HomeworkAce also works as a part-time bartender for Bob’s Bar and Grill. His form W-2 is as follows.

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Chapter 18: Additional Payments, Penalties, Chapter 18: Additional Payments, Penalties, Installment Agreement, and Injured SpouseInstallment Agreement, and Injured SpouseChapter Content

Payments Estimated Tax Payments Credit for Excess Social Security Tax Underpayment Penalty Paying the Amount You Owe Installment Agreement Injured Spouse First-time Homebuyer Credit Key Ideas

Objectives Be Aware Who Must Make Estimated Tax Payments Know How to Figure Excess Social Security Tax Learn When an Underpayment Penalty is Owed Understand How to Make an Installment Agreement Understand When to File an Injured Spouse Claim Understand How to File the First-Time Homebuyers

Credit

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Additional Payments, Penalties, Installment Additional Payments, Penalties, Installment Agreement, and Injured SpouseAgreement, and Injured Spouse

Form 1040, Page 2

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PAYMENTSPAYMENTS

A. Payments are reported on lines 62-70 of Form 1040 and are subtracted from your total tax on line 61.1. If your payments are more than your tax liability,

you are due a refund2. If your payments are less than your tax liability,

you must pay the amount owed3. Payments covered in prior chapters include withheld taxes, the earned income credit, and the additional child tax credit.

B. Also entered in the payments section of Form 1040 are the amounts of:1. Tax payments you made directly to the IRS (estimated tax payments), and2. Social security tax paid for you that exceeded the

maximum amount set by law.

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PAYMENTSPAYMENTS

Estimated Tax And PaymentsA. Estimated tax is the amount of tax liability you expect to

have for a tax year.1. The estimate is made before the tax year begins or early

in the year2. You must pay most of this tax as you earn the income

during the year3. Payment is made through withheld taxes and/or estimated tax payments.

B. You may need to make estimated tax payments if:1. The amount withheld from your salary or other income is

not enough to cover the amount of tax you are required to pay as you earn income during the year2. You are self-employed, or3. You receive interest, dividends, alimony, rent, or capital

gains.

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PAYMENTSPAYMENTS

C. Income, self-employment, and other taxes are paid by estimated tax payments.1. Enter the amount of the payments you made on

line 63 of Form 10402. If you do not pay enough through withholding and

estimated tax payments you may owe a penalty.

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WHO MUST MAKE ESTIMATED TAX WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEARPAYMENTS FOR NEXT YEAR

A. You must determine, at the beginning of the tax year, whether you need to make estimated tax payments.1. In general, you must make estimated payments if you expect to owe at least $1,000 in tax after subtracting your withholding and credits from

your expected total tax liability (estimated tax), and2. You expect your withholding and credits to be less

than the smaller of 90% of the expected tax for the year, or 100% of the tax shown on the prior year’s return.

3. Taxpayers with an AGI of more than $150,000 or $75,000 if MFS must pay a higher percentage of the prior year’s tax.

B. If all your income is subject to withholding, you generally do not need to make estimated payments.

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WHO MUST MAKE ESTIMATED TAX WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEAR – Problem 1PAYMENTS FOR NEXT YEAR – Problem 1

Judd is employed and also receives interest and dividend income. His total tax on Form 1040, line 61 of his 2008 return (which covered 12 months) was $4,000. In 2009, he expects his tax liability to be $5,000. $3,900 will be withheld from his wages in 2009 and he cannot claim any credits. He estimates the amount due with his 2009tax return will be $1,100. His withholding is less than 90% of his expected 2009 total tax liability (90% of $5,000 = $4,500) and less than 100% of his 2008 tax liability. Does Judd need to make estimated tax payments?

Yes or No?

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WHO MUST MAKE ESTIMATED TAX WHO MUST MAKE ESTIMATED TAX PAYMENTS FOR NEXT YEAR – Problem 1PAYMENTS FOR NEXT YEAR – Problem 1

Judd is employed and also receives interest and dividend income. His total tax on Form 1040, line 61 of his 2008 return (which covered 12 months) was $4,000. In 2009, he expects his tax liability to be $5,000. $3,900 will be withheld from his wages in 2009 and he cannot claim any credits. He estimates the amount due with his 2009tax return will be $1,100. His withholding is less than 90% of his expected 2009 total tax liability (90% of $5,000 = $4,500) and less than 100% of his 2008 tax liability. Does Judd need to make estimated tax payments?

Yes

Judd must make estimated tax payments to cover the difference unless he asks his employer to withhold more from his pay and completes a new Form W-4.

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C. Even if your income is not subject to withholding, you do not have to make estimated payments if:1. You had no tax liability for the prior year (your total tax was zero or you did not have to file a return)2. You were a U.S. citizen or resident for the whole

year, and3. Your prior tax year covered a 12-month period.

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D. Generally, if you are married you can choose to make joint or separate estimated tax payments.1. Apply the rules to your joint or separate income

depending on your choice.2. The choice to make either separate or joint tax payments will not affect your right to file either MFJ or MFS.

E. Refer to Table 18-1 for a flowchart of who has to pay estimated tax.

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FIGURING ESTIMATED TAX PAYMENTSFIGURING ESTIMATED TAX PAYMENTS

A. To determine the amount of your payments, you first must figure your estimated tax liability.1. Estimate your AGI (include all taxable income received whether or not tax is withheld from the income)2. Subtract your standard deduction or estimated itemized deductions and exemptions3. Subtract any credits you will claim, and4. Add other taxes you will owe.5. Use the worksheet included with Form 1040-ES and keep it with your records.

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B. The amount of the estimated tax you must pay during the year (the required annual payment) is the smaller of 90% of the expected tax for the tax year, or 100% of the total tax on your last year’s return (or a higher percentage if you are a higher income tax payer).1. Subtract your expected withholding from the required annual payment.

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FIGURING ESTIMATED TAX PAYMENTS – FIGURING ESTIMATED TAX PAYMENTS – Problem 1Problem 1

Meg's total tax for 2008 was $3,500. She estimates her tax for 2009 will be $4,200. Her required annual payment for 2009 is $3,500. $3,500 is the smaller of 100% of her 2008 total tax or 90% of her estimated 2009 tax ($3,780). Her estimated withholding is $2,000. What amount of estimated tax payments must Meg make in 2009 to avoid a penalty?

a. $1,000b. $1,500c. $2,000

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Meg's total tax for 2008 was $3,500. She estimates her tax for 2009 will be $4,200. Her required annual payment for 2009 is $3,500. $3,500 is the smaller of 100% of her 2008 total tax or 90% of her estimated 2009 tax ($3,780). Her estimated withholding is $2,000. What amount of estimated tax payments must Meg make in 2009 to avoid a penalty?

b. $1,500

The amount of estimated tax payments Meg must make in 2009 to avoid a penalty is $1,500 ($3,500-$2,000).

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Suppose Meg estimates her tax for 2009 will be $2,800. Her estimated withholding is still $2,000. Would Meg be required to make estimated tax payments?

Yes or No?

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Suppose Meg estimates her tax for 2009 will be $2,800. Her estimated withholding is still $2,000. Would Meg be required to make estimated tax payments?

No

Because her estimated tax NOT covered by withholding is less than $1,000, Meg is not required to make estimated tax payments ($2,800-$2,000=$800).

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When figuring your estimated tax, you can use prior year information as a starting point. Be sure to adjust for changes in both your own tax situation and the tax law.

Bo was divorced in January 2009. His former wife has custody of their child for whom she claims the dependent exemption. When figuring his estimated tax, Bo must take these changes into account or he will not get an accurate estimate of his tax liability for 2009. For 2008, Bo filed MFJ. In 2009, Bo's filing status is single with a lower standard deduction and has only his own exemption ratherthan three. As a result, his taxable income for 2009 will be higher even if his AGI is the same in 2008 and 2009. He will, therefore, have a greater tax liability in 2009.

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Form 1040-ES, Estimated Tax for Individuals, includes a worksheet to help you figure your estimated tax. Keep the worksheet with your records; do not send it to the IRS.

Early in 2009, Anne and Larry Jones figure their estimated tax payments for the year. They expect to receive the following income during 2009:

Larry's salary $34,200Unemployment compensation 600Anne's projected net self-employment profit 38,500Net rental income 2,671Dividends 3,745Interest income 2,300Total $82,016

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They also use the following expected items to figure their estimated tax:

Adjustment to income for IRA contributions $ 1,000Standard deduction 10,700Deduction for exemptions (2 X $3,500) 7,0002008 total tax 9,096Withholding from Larry’s 2008 salary 5,795

The Joneses plan to file a joint return for 2009. They use the 2009 Estimated Tax Worksheet included in Form 1040–ES to figure their estimated tax payments. Their completed worksheet follows this discussion.

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Expected adjusted gross income. Anne can claim an income tax deduction for one-half of her self-employment tax as a business expense. So before the Joneses figure their expected adjusted gross income, they figure Anne's expected self-employment tax as follows:

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1. Enter your expected income and profitssubject to self-employment tax $38,500

2. Multiply the amount on line 1 by .9235 $35,5553. Multiply the amount on line 2 by .029 $ 1,0314. Social security tax maximum income $106,8005. Enter your expected wages (if subject to

social security tax) -0-6. Subtract line 5 from line 4

Note. If line 6 is zero or less, enter –0–on line 8 and skip to line 9. $106,800

7. Enter the smaller of line 2 or line 6 $35,5558. Multiply the amount on line 7 by .124 $ 4,4099. Add line 3 and line 8. Enter the result here

and on line 11 of your 2009 Estimated TaxWorksheet $ 5,440

10. Multiply the amount on line 9 by .50. Thisis your deduction for one-half your self-employment tax $ 2,720

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The Joneses enter $35,555 on the dotted line and $5,440 in the blank on line 11 of the worksheet. They subtract one-half of that amount, $2,720, and their $1,000 adjustment for IRA contributions from their $82,016 total income to find their expected adjusted gross income, $78,296. They enter that amount on the worksheet line 1 and use their other information to figure their required annual payment, the amount they must pay by making estimated tax payments to avoid an underpayment penalty.

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WHEN TO PAY ESTIMATED TAXWHEN TO PAY ESTIMATED TAX

A. The year is divided into four estimated tax payment periods. The due dates are April 15, June 15, September 15, and January 15 of the following year.1. You do not have to make the January payment if you file

by January 31 and pay the rest of the tax you owe with the return.2. Refer to Table 18-2 for payment periods and due dates.3. You do not have to make estimated tax payments until

you have income on which you will owe tax.4. Refer to Table 18-3 for when to make payments based

on when you first receive taxable income.5. If changes in your income, exemptions, etc. change your

estimated tax, pay the new amount by the next due date or in installments.

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Table 18-2. When To Pay Estimated Taxes.

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Table 18-3. When To Make Installment Payments.

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David is an employee and taxes are withheld from his wages. In July, he sold stock and realized a long-term gain of $28,000. When he refigures his tax liability for the year, he determines that his withholding will underpay the new required annual payment by $2,000. He must either adjust his withholding to cover the difference or make a 3rd quarter estimated tax payment by September 15. He can pay the entire estimated tax payment by September 15 or pay half by September 15 and half by January 15.

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AMOUNT OF PAYMENTSAMOUNT OF PAYMENTS

A. Pay enough by the due date of each period to avoid a penalty for that period.

B. Use the regular installment method to figure your payments if you expect your annual estimated income to stay the same throughout the year.1. To find the amount due each payment period, divide the required annual payment you expect to owe for the year by 4.

C. Use the annualized installment method if you do not receive your income evenly throughout the year.1. To see if you can pay less for any period use the

worksheet and follow the instructions in Publication 505.

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HOW TO PAY ESTIMATED TAXHOW TO PAY ESTIMATED TAX

A. You can credit an overpayment on your last year’s return to the current year’s estimated tax payments by writing the amount you want credited online 72 of Form 1040.1. You can use the amount credited for your firstpayment or you can spread it out among any or all of your payments.2. Once you credit the overpayment to your estimated tax, you cannot have it refunded or use it in any other way after the first due date of

April 15.

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When Kathleen completed her 2008 tax return in March 2009, she saw that she had overpaid her taxes by $750. She knew her 2009 tax liability would increase, so she credited the $750 to her estimated tax for 2009. In September, she discovered she had not reported certain interest income. She amended her return to correct this. Her tax liability was $250 more than on the original return. Her 2008 overpayment was therefore only $500, not $750. Because the $750had already been applied to her 2009 estimated tax, the IRS billed her for the additional $250 she owed plus penalties and interest. Kathleen could not use any of the $750 she had credited to her 2009estimated tax to pay this bill.

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B. You can send your payments with the payment vouchers Form 1040-ES.1. The address to which you send estimated tax payments is different from the address to which you mail your return.

C. You can pay all or part of your estimated payments by credit card.1. The credit card processor will charge a fee based

on the amount of payment.2. Do not include the fee as part of your payment.

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Credit For Excess Social Security TaxA. If you worked for two or more employers, too much social

security or tier 1 and tier 2 railroad retirement (RRTA) tax may have been withheld from your pay.1. There is a maximum amount of wages subject to social

security tax and a maximum amount of tax that should be withheld.2. Refer to Table 18-4 for maximum wages and taxes.3. You can claim any excess amount withheld as a credit on

line 67 in the payments section of Form 1040.4. If any one employer withheld more than the maximum

tax, the employer must adjust this; you cannot claim the credit for this Form W-2.5. If MFJ, figure the credit separately for each spouse.

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You are married and file a joint return with your spouse who had no gross income in 2008. During 2008 you worked for the Brown Shoe Company and earned $67,000 in wages. Social security tax of $4,154 was withheld. You also worked for another employer in 2008 and earned $40,000 in wages. $2,480 of social security tax was withheld from these wages. Because you worked for more than one employer and your total wages were more than $102,000, you can claim a credit of $310 for the excess social security tax withheld.

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Add all social security tax withheld (but notmore than $6,324.00 for each employer). Enterthe total here

$6,634.00Enter any uncollected social security tax on tipsor group-term life insurance included in thetotal on Form 1040, line 61 –0–Add lines 1 and 2. If $6,324.00 or less, stophere. You cannot claim the credit

6,634.00Social security tax limit

6,324.00Credit. Subtract line 4 from line 3. Enter theresult here and on Form 1040, line 65 $

310.00

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UNDERPAYMENT PENALTYUNDERPAYMENT PENALTY

A. If you did not pay enough tax through withholding and/or estimated taxpayments during the year, you will have an underpayment of estimated tax.

B. In general, you will owe a penalty if your total tax payments did not equal your required annual payment.

C. Because the penalty is figured separately for each payment period, youmay owe a penalty for a period even if you made up the underpayment in a later payment period.

D. If you did not pay enough tax by each due date, you may owe a penaltyeven if you are due a refund when you file your tax return.

E. The minimum payment for a payment period is usually 1/4 of yourrequired annual payment.

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Meg, from a prior example, determined her required annual payment was $3,500 that was 100% of the total taxes on her last year’s return. She will pay this total through the $2,000 that is withheld from her pay and her $1,500 estimated tax payment. Each quarter, she must pay $875 (25% of $3,500) by the due date. The $875 is made up of ¼ of her withholding ($500) and ¼ of her estimated tax payment ($375).

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Exceptions To The PenaltyF. Generally, you do not have to pay a penalty if either

of the following conditions apply:1. Your total tax (line 61 amount minus certain credits and payments) minus the amount you paid through withholding is less than $1,000.2. Your total tax was zero or you were not required

to file a return last year; you were a U.S. citizen or resident for the whole year; and your tax year was 12 months.

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UNDERPAYMENT PENALTY – Problem 1UNDERPAYMENT PENALTY – Problem 1

Ray, who is single and age 22, was unemployed for most of 2007. He received $4,700 in wages and $1,000 in unemployment compensation. His gross income ($5,700) was less than the filing requirement for 2007. He filed a tax return only to have his withheld tax refunded to him. In 2008, Ray started his own business. He made no estimated tax payments during the year. Does Ray owe the underpayment penalty for 2008?

Yes or No?Yes or No?

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UNDERPAYMENT PENALTY – Problem 1UNDERPAYMENT PENALTY – Problem 1

Ray, who is single and age 22, was unemployed for most of 2007. He received $4,700 in wages and $1,000 in unemployment compensation. His gross income ($5,700) was less than the filing requirement for 2007. He filed a tax return only to have his withheld tax refunded to him. In 2008, Ray started his own business. He made no estimated tax payments during the year. Does Ray owe the underpayment penalty for 2008?

NoNo

Because he had no tax liability in 2007.

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Figuring The PenaltyA. In most cases, you do not need to figure the penalty; the IRS will

do it for you.1. Leave the penalty line (line 76) on Form 1040 blank if you

want the IRS to figure the penalty.2. You will not owe interest on the penalty as long as you pay it by the date specified on the IRS bill.

B. You must figure the penalty on Form 2210 if you:1. Request a waiver of the penalty,2. Use the annualized income installment method,3. Use your actual withholding for each payment for estimated tax purposes as paid on the date withheld instead of in equal amounts on the payment due dates, or4. Base any of your required installments on the tax shown

on your prior year’s return and you filed or are filing MFJ for either the prior or current year but not for both years.

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C. You can use the less complicated short method (Part III of Form 2210) to figure your penalty as a percentage of your total underpayment if:1. You made no estimated tax payments during the year, or2. You paid your estimated tax in four equal payments.

D. The regular method (Part IV of Form 2210) requires you to figure your underpayment and penalty for each payment period.

E. If you figure the penalty yourself, enter the amount of the penalty on line 76 of Form 1040 and add the penalty to the amount you owe on line 75 or subtract it from the amount you overpaid on line 72, to be refunded on line 73a.

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Waiver Of The PenaltyF. The IRS can waive the penalty for underpayment if it

determines:1. You did not make a payment because of a casualty, disaster, or other unusual circumstance, and that it would be inequitable to impose the penalty, or2. You retired (after reaching age 62) or became disabled during the tax year a payment was due or during the preceding tax year, and the

underpayment was due to reasonable cause and not willful neglect.

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PAYING THE AMOUNT YOU OWEPAYING THE AMOUNT YOU OWE

A. To avoid interest and penalties in addition to any underpayment penalty, it is best to pay the amount you owe when you file your return.

B. If you have a balance due on line 75 and cannot pay all or part of it with your tax return, you can ask for an installment agreement which will allow you to make monthly payments of the amount you owe.

C. Even if you cannot pay, you must still file your return on time.

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REQUESTING AN INSTALLMENT AGREEMENTREQUESTING AN INSTALLMENT AGREEMENT

Installment AgreementD. To request an installment agreement, file Form 9465 with

your tax return.1. On Form 9465, enter the total amount you owe, the amount of the payment you are making with the return, and the amount of the payment you will make each month.2. You generally should receive a response within 30 days

if filed before March 31.

E. If your request is approved, the IRS will charge you a $105 fee ($52 if you make payments by electronic funds withdraw). If your income is below a certain level, you may qualify to pay a reduced fee of $43.

F. In addition to the fee, you will be charged interest for the balance due payments until paid in full and you may be charged a late payment penalty on the amount not paid by the income tax due date.

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REQUESTING AN INSTALLMENT AGREEMENTREQUESTING AN INSTALLMENT AGREEMENT

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INJURED SPOUSEINJURED SPOUSE

A. If you owe past-due federal tax, state income tax, child or spousal support, or certain federal non-tax debts such as student loans, all or part of any refund due you may be used to pay (offset) the past due amount.

B. You are an injured spouse if you file a joint return and all or part of your share of an overpayment (refundable amount) was, or is expected to be, applied to your spouse’s past-due debt.

C. To get back your share of the overpayment you must file Form 8379.1. If you know your spouse has such a past-due debt, you

can file Form 8379 with Form 10402. You can also file the form as a stand-alone form after Form 1040 is filed.

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D. To be eligible to file the Form 8379, you:1. Must not be required to pay the past-due amount.2. Must have reported income such as wages, taxable interest, etc. on the joint return.3. Must have made and reported payments such as federal

tax withheld from your wages or estimated tax payments or claimed a refundable credit such as the earned income credit or additional child tax credit.

E. If your main home was in a community property state during the tax year, you may file Form 8379 even if only item 1 applies.

F. On Form 8379, you must allocate between the spouses the adjustments, deductions, exemptions, credits, other taxes, and payments shown on your tax return.

G. The IRS will figure the amount of any refund due the injured spouse based on the allocations you have made.

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H. Do not confuse an injured spouse claim with a request for innocent spouse relief.1. The injured spouse claim is used only to get a refund of your part of an overpayment that would otherwise be used to pay your spouse’s past due debt.2. A request for innocent spouse relief is a request

for relief from joint liability for taxes, interest and penalties on a joint return for items of the other spouse which were incorrectly reported

on the return.

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FIRST-TIME HOME BUYER CREDITFIRST-TIME HOME BUYER CREDIT

Who can claim the credit. You can claim the credit if you are a first-time homebuyer. You generally must repay the credit over a 15-year period.

You are considered a first-time home buyer if: You bought your main home in the US after April 8,

2008 and before July 1, 2009. You (and your spouse if married) did not own any

other main home during the 3-year period ending on the date of the purchase.

Your main home is the one you live in most of the time. It can be a house, houseboat, condominium, or other type of residence.

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FIRST-TIME HOME BUYER CREDITFIRST-TIME HOME BUYER CREDITWho cannot claim the credit. You cannot claim the

credit if any of the following apply. Your modified AGI is $95,000 or more ($170,000 if

married filing jointly). You are eligible to claim the District of Columbia

first-time homebuyer credit for 2008 or any other year.

Your home financing comes from tax-exempt mortgage revenue bonds.

You are a nonresident alien. Your home is located outside the US. You sell your home, or it ceases to be your main

home, before the end of 2008. You acquired your home by gift or inheritance You acquired your home from a related person such

as your spouse, ancestors (parents, grandparents etc), or lineal descendants (children, grandchildren, etc.).

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FIRST-TIME HOME BUYER CREDITFIRST-TIME HOME BUYER CREDIT

Amount of the credit.

Generally the credit is the smaller of $7,500 ($3,750 if married filing separately), or 10% of the purchase price

You are allowed the full amount of the credit if your MAGI is $75,000 or less ($150,000 or less if married filing jointly). The credit is reduced if MAGI is more than $75,000 ($150,000 if married filing jointly). The credit is eliminated completely if MAGI is more than $95,000 (($170,000 if married filing jointly) or more.

The credit is fully refundable.

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FIRST-TIME HOME BUYER CREDITFIRST-TIME HOME BUYER CREDITRecapture of the credit. You generally must repay

(recapture) the credit over a 15-year period in 15 equal installments. The recapture period begins 2 years after the year in which you claimed the credit. Thus, if you claimed the credit on your 2008 return, the recapture period begins in 2010 and you must include the first installment as additional tax on your return.

If your home ceases to be your main home before the 15-year period is up, you generally must include all the remaining as additional tax on the return for the tax year that happens. This includes situations where you sell the home or convert it to business or rental property.

To take the credit, complete Form 5405 and attach it to your Form 1040. Include your credit on Form 1040, line 69.

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KEY IDEAS

♦ Your estimated tax is the amount of tax liability you expect to have for the current tax year. To avoid a penalty you must pay a required annual payment of the smaller of: 90% of your estimated tax, or 100% of your prior year’s total tax during the tax year. If your withholding and credits are not expected to cover the entire amount of this required annual payment, you may have to pay the balance by making estimated tax payments.

♦ You do not have to make estimated tax payments if your estimated tax (the total tax you expect to owe) minus your expected withholding and credits is less than $1,000.

♦ If you do need to make estimated tax payments to avoid a penalty, you can pay the entire amount owed during the first quarter of the year or you can make quarterly payments. The payment due dates are April 15, June 15, September 15, and January 15 of the following year.

♦ If you do not make the required annual payment during the tax year, you may be assessed an underpayment penalty. If you did not pay the minimum payment each quarter, you may owe a penalty even if you are due a refund.

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KEY IDEAS

♦ If you cannot pay the entire balance you owe on line 75 of Form 1040, you can ask the IRS for an installment agreement to allow you to make monthly payments. If your request is approved, you will be charged a fee and will have to pay interest on the balance due until paid in full. You may also be charged a late payment penalty on the amount not paid by the income tax due date.

♦ You are an injured spouse if you file a joint return and all or part of your share of an overpayment (refundable amount) is applied to certain of your spouse’s past due debts such as child support. You can claim a refund of your share of any overpayment by filing Form 8379.

♦ You can claim the First-time Homebuyer Credit if bought a main home in the US after April 8, 2008 and did not own any other main home during the 3-year period ending on the date you bought the home.

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CLASSWORK 1: True or False.

(1) For 2008, Melody’s total tax is $3,400. Her total tax for 2007 was $3,200. The required annual payment she should have made during 2008 is $3,060.

(2) Form 1040, line 75 of Elizabeth’s 2008 tax return shows she owes $1,200. She does not have the money to pay this all at once so she pays $500 with her return and asks to make monthly installment payments on the balance of $700. Even if the IRS grants her request, Elizabeth may still be charged a late payment penalty on the $700 she does not pay by April 15, 2009.

(3) Alice is self-employed, has no withholding and had a tax liability of $5,000 for 2008. In 2007, her tax liability was $4,500. She did not make an estimated tax payment by April 15, 2008. As long as she made up that payment with her payment due June 15, she does not have to worry about being assessed an underpayment penalty.

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(4) Vic’s 2008 total tax is $5,100. The federal income tax withheld from his wages is $4,150. Vic will not have to pay an underpayment penalty.

(5) In 2008, Blair worked for a brokerage company and her salary and

other compensation in box 1 of her W-2 form is $104,000. This is her total income for the year. Box 4 of her W-2 form shows social security tax withheld of $6,448. Blair can claim a credit of$124.00 on her 2008 return.

(6) If you do not pay enough in withholding and/or estimated taxeseach payment period, you may be charged a penalty even if youare due a refund when you file your tax return.

(7) James and Danielle both worked in 2008 and had tax withheldfrom their wages. They file MFJ. For 2008, the amount of theiroverpayment shown on line 72 of their Form 1040 is $2,300.James owes past due amounts on his student loan. Danielle can be considered an injured spouse.

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(8) If you expect to owe $1,000 or less for the tax year aftersubtracting your income tax withholding and credits from yourtotal tax, you do not have to make estimated tax payments.

(9) If the amount you owe on line 75 of Form 1040 is $1,000 or more,the IRS will figure the underpayment penalty for you. However,you will have to pay interest on the amount of the penalty fromApril 15 to the date you pay it.

(10) To ask for a waiver of the underpayment penalty, you must fileForm 2210.

(11) You must get IRS approval to pay your estimated tax ininstallments.

(12) The required annual amount of taxes you must pay during the year is always equal to the amount of your estimated tax payments.

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(13) Sally Spender could not pay all the balance due of $3,000 she owed on her 2007 tax return so she entered into an installment agreement with the IRS. In 2008, she again cannot pay the full balance due on her return of $2,400. The IRS will have to accept another installment agreement if Sally requests it.

(14) To claim your share of any overpayment used to pay a past due debt of your spouse, you can file Form 8379 either with your tax return or after the return is filed.

(15) If you file your tax return by January 31 and pay the rest of the tax you owe with the return, you do not need to make the estimated tax payment that would be due by January 15.

(16) Alex claimed a $7,500 first-time home buyer credit on his 2008 return. He must include $500 as additional tax on his 2010 tax return and on each tax return for the next 14 years.

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(1) For 2008, Melody’s total tax is $3,400. Her total tax for 2007 was $3,200. The required annual payment she should have made during 2008 is $3,060. T

(2) Form 1040, line 75 of Elizabeth’s 2008 tax return shows she owes $1,200. She does not have the money to pay this all at once so she pays $500 with her return and asks to make monthly installment payments on the balance of $700. Even if the IRS grants her request, Elizabeth may still be charged a late payment penalty on the $700 she does not pay by April 15, 2009. T

(3) Alice is self-employed, has no withholding and had a tax liability of $5,000 for 2008. In 2007, her tax liability was $4,500. She did not make an estimated tax payment by April 15, 2008. As long as she made up that payment with her payment due June 15, she does not have to worry about being assessed an underpayment penalty. F

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(4) Vic’s 2008 total tax is $5,100. The federal income tax withheld from his wages is $4,150. Vic will not have to pay an underpayment penalty. T

(5) In 2008, Blair worked for a brokerage company and her salary and

other compensation in box 1 of her W-2 form is $104,000. This is her total income for the year. Box 4 of her W-2 form shows social security tax withheld of $6,448. Blair can claim a credit of$124.00 on her 2008 return. F

(6) If you do not pay enough in withholding and/or estimated taxeseach payment period, you may be charged a penalty even if youare due a refund when you file your tax return. T

(7) James and Danielle both worked in 2008 and had tax withheldfrom their wages. They file MFJ. For 2008, the amount of theiroverpayment shown on line 72 of their Form 1040 is $2,300.James owes past due amounts on his student loan. Danielle can be considered an injured spouse. T

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(8) If you expect to owe $1,000 or less for the tax year aftersubtracting your income tax withholding and credits from yourtotal tax, you do not have to make estimated tax payments. F

(9) If the amount you owe on line 75 of Form 1040 is $1,000 or more,the IRS will figure the underpayment penalty for you. However,you will have to pay interest on the amount of the penalty fromApril 15 to the date you pay it. F

(10) To ask for a waiver of the underpayment penalty, you must fileForm 2210. T

(11) You must get IRS approval to pay your estimated tax ininstallments. F

(12) The required annual amount of taxes you must pay during the year is always equal to the amount of your estimated tax payments. F

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(13) Sally Spender could not pay all the balance due of $3,000 she owed on her 2007 tax return so she entered into an installment agreement with the IRS. In 2008, she again cannot pay the full balance due on her return of $2,400. The IRS will have to accept another installment agreement if Sally requests it. F

(14) To claim your share of any overpayment used to pay a past due debt of your spouse, you can file Form 8379 either with your tax return or after the return is filed. T

(15) If you file your tax return by January 31 and pay the rest of the tax you owe with the return, you do not need to make the estimated tax payment that would be due by January 15. T

(16) Alex claimed a $7,500 first-time home buyer credit on his 2008 return. He must include $500 as additional tax on his 2010 tax return and on each tax return for the next 14 years. T

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CLASSWORK 2: Multiple Choice

1. To be considered an injured spouse (except in a community property state), you must:

a. File a joint returnb. Have reported income such as wages or interestc. Have made tax payments through withholding or

estimated payments or have claimed a refundable credit

d. All of the above

2. Charlotte’s total tax in 2008 was $6,000. For 2009, she estimates her total tax will be $5,700. She will have $4,000 withheld from her wages. Her requiredannual payment during 2009 is:

a. $6,000b. $5,130c. $1,130d. $1,700

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3. You must file Form 2210 with your tax return if: a.The amount you owe is at least $1,000b.You are filing your return after the due datec.You did not make estimated tax payments as required

during the yeard.You are requesting a waiver of the underpayment

penalty

4. Wally Worcsalot and his wife had total taxable wages of $115,000. Mrs. Worcsalot’s 2008 wages were $20,000 and box 4 of her Form W-2 showed $1,240. Wally had three jobs in 2008. Box 4 of his W-2 form for the first job showed $2,370. Box 4 for the second job showed $2,990 and box 4 for the third job showed $1,209. They can claim a credit on Form 1040, line 65 in the amount of:

a.$1,209b.$245c.$1,485d.$450

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5. You will not owe an underpayment penalty for 2008 if:a. The total tax shown on your return minus your withholding

is less than $1,000b. Your total tax minus your estimated tax payments is less

than $1,000c. You paid 100% of the amount you owed on Form 1040 in

the prior tax yeard. All of the above

6. 6. You cannot claim the first-time home buyer credit if:a. our home is located outside the US

before the end of 2008.b. You sell the home or it ceases to be your main home c. You acquired the home from your mother.d. All of the above.

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1. To be considered an injured spouse (except in a community property state), you must: d. all of the above

2. Charlotte’s total tax in 2008 was $6,000. For 2009, she estimates her total tax will be $5,700. She will have $4,000 withheld from her wages. Her requiredannual payment during 2009 is: b. $5,130

3. You must file Form 2210 with your tax return if: d. you are requesting a waiver of the underpayment penalty

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4. Wally Worcsalot and his wife had total taxable wages of $115,000. Mrs. Worcsalot’s 2008 wages were $20,000 and box 4 of her Form W-2 showed $1,240. Wally had three jobs in 2008. Box 4 of his W-2 form for the first job showed $2,370. Box 4 for the second job showed $2,990 and box 4 for the third job showed $1,209. They can claim a credit on Form 1040, line 65 in the amount of: b. $245

5. You will not owe an underpayment penalty for 2008 if:a. the total tax shown on your return minus your withholding is less than $1,000

6. You cannot claim the first-time home buyer credit if:a. our home is located outside the US

before the end of 2008.b. You sell the home or it ceases to be your main home c. You acquired the home from your mother.d. All of the above.

d. All of the above

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CLASSWORK 3: For each of the following taxpayers determine the required annual payment each owes, whether the taxpayer must make estimated tax payments, and if so the amount of each installment using the regular installmentmethod. None of the taxpayers is claiming any tax credits.

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2008 Tax

2009 estimated

tax2009 with-

holding

Required annual

payment?

Pay estimated

taxes?Each

installment?

1. $7,200 $8,000 $6,200

2. $5,320 $4,890 $3,800

3. $6,600 $7,200 $0

4. $4,370 $4,950 $4,370

5. $3,440 $3,750 $2,200

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2008 Tax

2009 estimated

tax2009 with-

holding

Required annual

payment?

Pay estimated

taxes?Each

installment?

1. $7,200 $8,000 $6,200 $7,200 Yes $250

2. $5,320 $4,890 $3,800 $4,401 Yes $150.25

3. $6,600 $7,200 $0 $6,480 Yes $1,620

4. $4,370 $4,950 $4,370 $4,370 No

5. $3,440 $3,750 $2,200 $3,375 Yes $293.75

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