Category: Individual
Subject: Estimated Taxes
Title: Required Estimated Tax Payments
IRC Sections: 6654(d)
Filename: 1384.html
Date Produced: 04/98

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Background
Taxpayer, an individual, filed an income tax return for 1997 showing a tax liability of $40,000. The return for 1997 covered a full 12-month period. In the first quarter of 1998, the taxpayer received a very large bonus on which no federal income tax was withheld. The taxpayer expects a tax liability of approximately $125,000 for 1998.

Issue
Does the bunching of income in the first quarter of 1998 affect the taxpayer's ability to utilize the 100%-of-prior-year's tax liability rule for 1998 estimated taxes?

Answer
Timing of income in 1998 has no effect on the taxpayer's ability to utilize the 100%-of-prior-year's-tax rule for 1998 estimated taxes. IRC Section 6654(d)(1)(B)(ii).

Discussion
The requirement to pay estimated taxes is stated in terms of a required annual payment. Except where the annualization exception provides a lower amount, the required quarterly installment is 25% of the required annual amount. Section 6654(d)(1)(A).

Section 6654(d)(1)(B)(i) and (ii) define the required annual payment as the lesser of the following.

i) 90% of the tax shown on the current return; or
ii) 100% of the tax shown of the return of the preceding tax year.

Note: for installments for preceding tax years beginning in 1998, 1999, or 2000, the required annual installment under Section 6654(d)(1)(B)(ii) is 105% instead of 100%. For preceding tax years beginning in 2001, the required installment increases to 112%of prior year's tax, and for preceding tax years beginning in 2002 and thereafter, the amount is 110%. These rules only apply if the taxpayer's adjusted gross income for the preceding year exceeds $150,000. Other taxpayers may continue to use 100% of preceding year's tax liability.

In order to be eligible to use the 100%-of-prior-year's-tax rule, the taxpayer must have filed a return for the preceding tax year and that return must cover a full twelve-month period.

There is clearly no provision in the law having the effect of disallowing the use of the 100%-of-prior-year's-tax exception based on bunching of income or any other event in the current tax year. It is clear that the minimum installment is solely based on the tax shown on the prior year's return: that is the only determining criterion. Provided the taxpayer is eligible for the 100%-of-prior-year's-tax rule, it does not matter what happens in the current tax year.