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Tax Practice: Estimated Tax Payments Aren't Estimates Anymore

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In the past, an individual required to make quarterly estimated tax payments was protected by a safe harbor in Internal Revenue Code section 06654(d)(1)(B), which defined required annual payments as the lesser of the following:

* 90% of the tax shown on the individual's return for the taxable year (or, if no return was filed, 90% of the tax for such year).

* 100% of the tax shown on the individual's return for the preceding taxable year (assuming the preceding taxable year was 12 months and a return was filed).

Individuals who anticipated their current year's tax would exceed the prior year's tax would make quarterly estimated payments sufficient to cover the tax shown on the prior year's return. If this was done, no underpayment penalty applied.

Example: Pitt's 1900 tax liability was $49,000. His 1991 estimated payments totaled $50,000. His 1991 tax liability, as shown on his return, is $500,000. Because 1991 estimated payments were at least 100% of his 1990 tax liability, no underpayment penalty is imposed.

NEW RULES

Congress passed EUCA on November 15, 1991, to fund an extension of unemployment benefits. It amended IRC section 6654(d)(1) and changed the required estimated tax payments for certain individuals. The amendments apply to taxable years beginning after December 31, 1991, and are set to expire for taxable years beginning after December 31, 1996.

Under the revised rules, a taxpayer must, in certain cases, make quarterly installments sufficient to cover the greater of

* 100% of the tax shown on his or her return for the preceding taxable year.

* 90% of the tax shown on the current year's return, taking into account certain adjustments to arrive at a modified adjusted gross income (MAGI), as defined below.

Example: For 1992, Lawson's tax liability, as shown on her return, is $100,000....