Estimated tax payment requirements for 1993 and beyond.
Although this heavily criticized rule was repealed by the Revenue Reconciliation Act of 1993 (RRA) for tax years beginning after Dec. 31, 1993, it continues to apply to individuals, estates or trusts for 1993, if both of the following conditions are met:
1. Adjusted gross income (AGI) for 1993 exceeds $75,000 ($37,500 for a married taxpayer filing a separate return); and
2. AGI (as modified by Sec. 6654(d)(1)(D)) for 1993 exceeds the prior year's AGI by more than $40,000 ($20,000 for a married taxpayer filing a separate return).
There are several important exceptions to this rule:
[ ] No tax liability for preceding year: Pursuant to Sec. 6654(e)(2), estimated tax underpayment penalties will not be imposed on an individual, estate or trust if the following three conditions are satisfied:
1. The preceding tax year was a period of 12 months;
2. The taxpayer did not have any liability for tax for the preceding tax year; and
3. The taxpayer was a U.S. citizen or resident throughout the preceding tax year.
This exception applies even if the taxpayer's AGI for the current year exceeds $75,000 and has increased by more than $40,000 over the prior tax year. This exemption from underpayment penalties will continue to apply after 1993 under the revised rules.
[ ] First-time estimates: The $75,000 AGI/$40,000 increase restriction does not apply to a taxpayer who has not made estimated tax payments in any of the three preceding tax years (and who has not incurred a penalty for failure to pay estimated tax for any of those years). The application of an overpayment from a previous year is not treated as an estimated tax payment for purposes of this rule. This provision will be inapplicable after 1993.
[ ] First quarter payments: For 1993, it was permissible to rely on the prior year's tax for first quarter estimated tax payments. However, if the first quarter payment was less than the amount required under the $75,000 AGI/$40,000 increase rule, the shortfall had to be paid with the second quarter estimate in order to avoid underpayment penalties for the balance of the tax year. This provision will have no applicability after 1993 under the revised rules for high-income taxpayers.
[ ] Annualized income exception: Individuals may still use the annualized income exception of Sec. 6654(d)(2) to avoid underpayment penalties for any quarterly payment. The annualized income exception is calculated by determining the individual's taxable income and deductions for all months prior to that in which an installment is due, and multiplying this amount by the applicable annualization factor. For purposes of the annualization exception, a taxpayer may use "modified" AGI (as defined by Sec. 6654(d)(1)(D)) and may assume that "modified" income from a qualified pass-through entity is earned ratably during the current tax year. The annualized income exception will continue to apply after 1993, but the election to compute annualized income on the basis of "modified" AGI will no longer apply.
New rules for 1994
As a result of RRA changes, individuals, estates and trusts whose AGIS for the 1993 tax year exceed $150,000 will generally be required to base 1994 estimates on 110% of their 1993 tax to avoid estimated tax penalties (versus 100% for taxpayers with AGIS of $150,000 or less). Such taxpayers will not be required to pay in 90% of their actual 1994 liability to avoid penalties, even if 1994 AGI exceeds the prior year amount by more than $40,000. However, an estimate can still be safely based on 90% of the actual 1994 tax if this is less than 110% of the taxpayer's 1993 liability.
In general, a "small" corporation may safely base its estimated tax payments on 100% of its tax liability for the preceding tax year. ("Large" corporations may only use the prior year tax exception to avoid penalties for the first quarter.) A "small" corporation is a company with taxable income of less than $1 million for each of the three preceding tax years. For this purpose, taxable income is determined without regard to any net operating loss or capital loss carryovers or carrybacks, and the $1 million limitation must be divided among members of a controlled group of corporations, including any predecessor of the taxpayer.
Unlike individual taxpayers, however, a small corporation may not rely on the prior year's tax as an exception to underpayment penalties if it had a zero tax liability in the preceding tax year. In this situation, even a "small" corporation must make estimated tax payments at least equal to 100% of its tax liability for the current year (97% for tax years beginning before 1994; 93% for tax years beginning before July 1, 1992) in order to avoid penalties for underpayment of estimated tax.
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|Author:||Addison, Emerson J., Jr.|
|Publication:||The Tax Adviser|
|Date:||Dec 1, 1993|
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