Tax question: Overpaying estimated taxes
 

Due to a sizable drop in my income since last year and the addition of being able to write off interest on house payments, I have already overpaid in estimated taxes for 2006 with the final quarter's payment due to be mailed on Monday. (Some background: I am self-employed and had based my estimated payments this year on my income/taxes last year.) Obviously I'd rather not send the government a bunch of money unnecessarily, but I can't find anything on exactly what I should do.

So I need the help of the FOFC tax experts. Should I send in my 4th quarter voucher with a 0 on it? Should I pay the final payment to be safe? I am lost.

Usual disclaimer here - my answers are generalities and should not be construed as specific tax advice. Consult your tax preparer for advice specific to your tax situation.

Ok that's done.

First of all, Monday is a Federal holiday so your payment doesn't need to be post marked until Tuesday.

There's a couple of answers to this question, depending on what your 2005 AGI (AGI = Adjusted Gross Income) was.

If your AGI was over $150,000 I suggest you make the payment. Taxpayers with AGI's of $150,000 or higher are generally required to pay estimated taxes equal to or greater than 110% of the prior year's tax liability. You can be penalized if you do not.

If your AGI in 2005 was less than $150,000, if you've paid in 100% of your prior year's tax liability OR the amount paid in totals 90% of your current year liability, you will not be penalized for not making the 4Q06 es payment. If you've already paid in enough to meet either of those requirements, it's doubtful you have to pay it.

There are exceptions to both of those requirements, so you may need to consult your tax advisor. Just another CYA there. Or should I say CMA? Cover my ass. ;)

Hope that helps.

Thank you. That's exactly what I was looking for.

ooooooh baby! i got dibs on the red-head!

I know that people above a certain income amount don't benefit from the tax benefits from paying interest on educational loans. Does this rule also apply to the interest paid on a house mortgage?

Not 100% sure, but I think the answer is technically no, however, you are much more likely to hit get hit with the AMT which doesn't allow for mortgage deductions.

Kind of, depending on how high your AGI is.

Once AGI exceeds $149,950 some itemized deductions are reduced by 3% of the amount that exceeds the $149,950 threshhold OR 80% of the deduction that impacted by this limitation. Whichever is smaller. Mortgage interest is one of those subject to this limitation. This might help a little.

There's also the AMT implications as well, but it's not a limiting factor merely a timing issue. To calculate your AMT, the mortgage interest deduction isn't allowed. But if you are required to pay AMT the amount paid turns into a tax credit that can offset future AMT. So it's really just timing when the Service gets your cash.

Take a number big boy, there are at least 4 people in front of you. :p

Thanks Farrah, your answer and that link were helpful.