Posted on March 16, 2005 at 16:48:00:
After years of earning a salary and having taxes withheld, the new retiree has to decide how much estimated tax to pay each quarter. There are several ways to proceed.
Here’s one easy way. Take the first quarter’s income and multiply by four; that is annualized net income. Figure the estimated tax on that, then divide by four to figure the first quarter’s payment. At the end of the second quarter, multiply income to date by two and figure the tax on that. The second installment, with the first should cover half the annual tax. Keep correcting, if necessary, each quarter for the first year.
After the first year, it’s fairly simple. To avoid penalties, pay in at least 90 percent of your current tax liability or 100 percent of last year’s. But if adjusted gross income was more than $150,000, or $75,000, the safe-harbor amount is 110 percent of the last year’s taxes. Note: safe harbor may lead to an overpayment.