As you begin a new job, or if you are a longer-term employee who is just starting to make contributions to a 401(k) plan, you are confronted with a question:  How does a contribution to the 401(k) plan impact the final take home pay on my paycheck? Believe it or not, you could actually increase your bottom line assets by reducing your income through a 401(k) contribution.

Let’s work through an example so that we can more completely understand what happens.

Your New Job

So, you’ve started a new job, with an annual pay of $30,000.  We won’t go into all of the details behind a W4 at this point, but for the sake of the example, we’ll say you filed your W4 to exactly match your tax expected of $2,603 for the year (and you started in January).  In addition to this, you have opted to take advantage of your employer’s health insurance plan, which costs $50 per month.  You are paid on an every-other-week schedule, for 26 pay periods per year.

This means that your take-home pay amounts to approximately $884.82, which is calculated as follows:

Your 401(k)

So, you now are ready to begin making contributions to your available 401(k) plan.  The company will match your contributions as follows:

100% of the first 2% of contributions

50% of the next 2% of contributions

25% of the next 2% of contributions

If you make a total of 6% in contributions, the company will match that with 3.5% contributed to your account.  Your 6% of $30,000 will amount to $1,800 per year, and the company match will be an additional $1,050, for a total contribution of $2,850.

For each paycheck, you are making a contribution of 6%, which is $69.23, and the company’s match is an additional $40.38 added to your account.  The result in change to your paycheck will work out as follows:

The difference in your final take-home pay is only $55.48, which is $13.75 less than the amount that you contributed to the 401(k) account.  This is due to the fact that when you make a contribution to the 401(k) account, this amount is no longer subject to income tax.

When you consider what your overall economic result from this new paycheck is, you’ll see that making the 401(k) contribution is, indeed, a no-brainer:

As you can see, the end result is that you actually have increased your overall money on your balance sheet assets by $54.13, which is a 6.11% increase.  Granted, your 401(k) account and the company match are restricted in access, but your overall situation is a significant increase.

Keep in mind that, while we used 401(k) as the example type of account, the same could apply to a 403(b), or other sort of tax-deferral account.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

When you don’t file your tax return or if you don’t pay the tax owed on time, the IRS has specific penalties that are applied to your account.  Recently the IRS issued their Tax Tip 2012-74, which lists eight facts about these penalties.  The actual text of the Tax Tip is listed below:

Failure to File of Pay Penalties: Eight Facts

The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns.  When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay, or both.

Here are eight important points about the two different penalties you may face if you file or pay late.

1. If you do not file by the deadline, you might face a failure-to-file penalty.  If you do not pay by the due date, you could face a failure-to-pay penalty.
2. The failure-to-file penalty is generally more than the failure-to-pay penalty.  So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options.  The IRS will work with you.
3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late.  This penalty will not exceed 25 percent of your unpaid taxes.
4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid.  This penalty can be as much as 25 percent of your unpaid taxes.
6. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.  However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

As reviewed in the article The Family Maximum Benefit (Retirement), there is a maximum amount that can be paid on a particular Social Security record.  As you’re planning for your family’s benefits, it is important to know what is involved in establishing the maximum benefit, as well as what can be impacted by the maximum limit.

What’s Not Included

Maybe it would be easiest to point out a few things that don’t go into the calculation for the Family Maximum limit:

• Ex-spouse spousal benefits are not included
• Ex-spouse survivor benefits are not included
• Any delayed retirement credits on the primary beneficiary’s record are not included

So – with those items excluded, that leaves us with the question of what IS included:

What Is Included

Included in calculating the Family Maximum benefit limit would be everything else that wasn’t specifically excluded, based upon the primary recipient’s record:

• Primary beneficiary’s benefit, up to the Primary Insurance Amount
• Spousal Benefits for a current spouse (not an ex)
• Survivor Benefits for the spouse who was married to the primary beneficiary at the date of death
• Child’s benefits
• Spouse benefits for a spouse caring for young children under age 16
• Other beneficiary benefits, including aged parents, other dependents, etc.

What Can Be Impacted by FMB

Once the Family Maximum Benefit amount is calculated, certain benefits can be reduced as a result (if the maximum is breached).  First of all, it’s important to note that those benefits mentioned in the “What’s Not Included” section above are not subject to reduction by the FMB.  In addition, the primary beneficiary’s retirement or disability benefit would also not be reduced by a limit imposed by FMB.

All of the other, secondary benefits, such as survivor benefits by the last-current spouse, spousal benefits, child’s benefits, and other beneficiary benefits can be reduced.  Each benefit is reduced pro-rata depending on the FMB figure that has been developed.

Example

So let’s work through an example: John, age 70, just filed for his retirement benefit, in the amount of $3,000.  His Primary Insurance Amount (PIA) is $2,273.

John was married twice previously, to Jane first (age 62) and then to Sally (age 63), and each of those marriages lasted more than ten years.  He married his current wife, Celeste (age 30), three years ago and they have newborn triplets.

The family maximum benefit is calculated as follows (2012 figures):

1) 150% of the first $980 = $1,470

2) 272% of the next $435 = $1,183

3) 134% of the next $430 = $576

4) 175% of the remaining PIA ($428) = $749

5) adding these up ($1,470 + $1,183 + $576 + $749) = $3,978 <= this is the FMB limit for John’s record

Now, we know that Jane’s spousal benefit and Sally’s spousal benefit are not included in the FMB.  Additionally, John’s Delayed Retirement Credit ($727) is also not included.  The following benefits are included in determining if the FMB has been reached:

John’s PIA of $2,273

Celeste’s benefit for caring for the children of $1,136 (half of John’s)

Each child’s benefit of $1,136 (x3 = $3,408) (also half)

For a total of $6,817, which is $2,839 more than the FMB.  Since John’s PIA amount cannot be reduced, Celeste’s and the childrens’ benefits will be reduced at a rate of 58% less than their original amounts – to $477 for each of the benefits.  (That calculation was done by taking the full FMB, subtracting John’s PIA, and then splitting up the remaining amount pro rata among the other beneficiaries.)

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

I thought it might be helpful to work through an example of an IRA that has been inherited by multiple beneficiaries, so that we can discuss the important components of working with such a situation.

In our example, we’ll say there is an IRA worth $800,000 at the date of death of the original owner, and she has designated four beneficiaries of the account.  One of the first factors that is important to note is that the beneficiaries could be anyone – they do not have to be related to the original owner, or likewise they could be the children, grandchildren, nieces, nephews, brothers or sisters of the original owner.  For the purpose of this example though, none of the beneficiaries is the surviving spouse of the original owner – surviving spouses have different rules to work from.

Option 1 – Do Nothing

The beneficiaries of the original account could choose to make no changes to the account, leaving it exactly where is was during the life of the original owner. Assuming that the original owner was not subject to Required Minimum Distributions (that is to say, the original owner was not age 70½ or older), the account will be distributed over the lifetime of the oldest of all the beneficiaries, in equal shares to each of the four.  Table I, Single Life Expectancy, is used to determine the amount of the distribution, and the age is the age of the oldest beneficiary. (If the original owner was subject to RMD, the beneficiaries have the option of using her lifespan instead of the lifespan of the oldest beneficiary if this would result in a longer payout period.)

This option results in the least amount of “moving parts” and is likely the simplest to implement, but as we all know, getting four people to agree on things like how to manage the account, what investments to make, etc., is a difficult task.  This option also requires the younger beneficiaries to take distributions of larger amounts than would be required if the account were distributed over their own, longer, life span.

Option 2 – Separate Accounts

The beneficiaries of the IRA account have the option of splitting up the account into equal shares of the original account.  In this fashion, each individual would own an account, titled as “inherited” so that there’s no misunderstanding – the account is inherited, not a regular IRA (more on this later).

Once the separate accounts are set up, each of the four beneficiaries is allowed to (actually required to) take distributions over his or her own lifespan, rather than all being required to take distributions over the oldest beneficiary’s lifespan as was the case in Option 1.  In addition, each beneficiary can now make the investment and management decisions about the account separately.  The individual beneficiary should now also designate a beneficiary for any amount that is remaining in the account when the individual beneficiary dies.

Important Points

A few points that are very important to note here:

• The separate accounts are the property of each individual beneficiary, but the account must retain a title which clearly designates the account as inherited.  Since the account is inherited, the owner of the account cannot make contributions to the account, roll it over into another IRA account, or convert the account to a Roth IRA.
• When creating the separate accounts, it is important to ensure that the transfer is a trustee-to-trustee transfer.  If the funds are removed from the account (as in a 60-day transfer) then contribution back into an IRA is not allowed, and the amount distributed is no longer considered to be an IRA.
• The separate accounts must be established by December 31 of the year following the year of the death of the original owner.  If not established by this date, then Option 1 is the default, and now only, option available.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Remember way back in 2011, when the Social Security Administration used to send you a paper statement every year?  This was a useful statement, which included the estimates of your future benefit at age 62, full retirement age, and age 70, as well as a run-down of your year-by-year earnings information.  Ah the good ol’ days…

Sometime in 2011 the SSA stopped mailing those statements, and instead made available on their website a series of calculators which would give you your Primary Insurance Amount (the amount you’d receive at Full Retirement Age) estimate, but little else.  This calculator was nowhere near as useful, and lots of folks were upset about it.

Well, apparently someone at SSA listened, because now there is a new option on the SSA website, at www.socialsecurity.gov/mystatement, where you can create an account and receive essentially the same information that was previously available on the paper statement – including earnings history!  How about them apples??

But that’s not all…

I have also have it on good authority from a source within SSA that the paper statements will be coming back.  Only for folks age 60 and older, but hey, that’s who really needs this information anyhow, so this is great!

Great job, Social Security!

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

When the owner of an IRA dies and leaves the IRA to his or her spouse as the sole beneficiary, there are some unique options available for handling this inherited IRA.  Keep in mind that these options are only available to a spouse a beneficiary – a non-spouse beneficiary has much more limited options available.

Options for a Spousal Beneficiary of an IRA

The first and easiest option is for the spouse to leave the IRA exactly where it is and do nothing.  In this manner, the IRA will continue to exist as belonging to the deceased spouse – for a time.  If the deceased spouse was over age 70½ years of age and subject to Required Minimum Distributions (RMDs), the surviving spouse could elect to continue receiving those RMDs using his or her late spouse’s lifetime as the distribution factor.

On the other hand, if the deceased spouse was not subject to RMDs, the surviving spouse could also begin receiving RMDs from the inherited IRA based upon his or her own age.  This is a viable option as well.

On the third hand, after leaving the IRA in the name of the deceased spouse the surviving spouse could also opt to not take RMDs from the account at all – in this case the inherited IRA would be considered to be owned by and controlled by the surviving spouse, no longer an inherited IRA.  If the surviving spouse is over age 70½, he or she will need to begin receiving RMDs from the account based on his or her age.

Another option available to a spousal beneficiary of an IRA is to rollover the account into an IRA in his or her own name.  This would give the surviving spouse the same result as the “third hand” mentioned above.

In other words, both of these last two options results in the IRA being treated as if it was owned by the surviving spouse.  He or she is eligible to make contributions to the account, take withdrawals if over age 59½ (or if one of the exceptions applies) without penalties, rollover the account to another IRA or Qualified Retirement Plan, and convert the account to a Roth IRA.

Why Would the Spouse Choose One Option Over Another?

In some instances, it could be advantageous to leave the IRA in the name of the deceased spouse.  For an example, let’s say Jane died leaving John (her husband) as the sole beneficiary of her IRA.  Jane was 70 years old and not yet subject to RMD, but eligible for penalty-free distributions.  John is 57 years old, and as such he’s not yet eligible to take IRA distributions from a regular IRA in his own name.  Once the time has passed when Jane would have reached age 70½, John will be subject to RMDs from the account based upon Jane’s age (since it’s still in her name) but if he needs the income he has it available without penalty.  If he rolls over the account to his own name at age 57 he will not have penalty-free access to the funds for 2½ more years.

So, leaving the account in Jane’s name will allow John to take withdrawals from the account without penalty.  Once John reaches age 59½ he can rollover the account to an account in his own name, which will allow him to name beneficiaries of the account on his own (otherwise the original beneficiary designations that Jane made are still controlling the account).

Another situation that might make sense for the surviving spouse to leave the account in the name of the deceased spouse is if the surviving spouse is older.  From our example, if Jane and John’s ages were switched (Jane, the deceased was 57 and John is 70) then John could benefit from leaving the account in Jane’s name. This is because he could take distributions from the account without penalty (death benefits are penalty-free) without being required to take distributions (when he reaches 70½).

At the point in the future when Jane would have been age 70½, John could rollover the IRA into an account in his own name, again so that he can name his own beneficiary for the account.  This way he didn’t have to take RMDs until that point.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

This was a good book, I truly enjoyed reading it.  The primary reason that I enjoyed it so much is because it’s the book I have been hoping to find from someone like author Joshua Brown: a book that tells the truth about what’s really going on on the seamy side of Wall Street (which is the only side, to be truthful).

Joshua Brown (TheReformedBroker.com) provides a unique perspective – that of someone who has been involved in the “inside” of wirehouse broker-dealers, but who has since seen the light and moved on to a career in independent investment advice.  As such, Mr. Brown has seen the worst of the worst, in terms of how these institutions treat the investing public.  Once he became aware of how it all worked, through a great degree of soul-searching (and a whole lot of gumption), stepped away from it all and has never looked back.

In Backstage Wall Street, Brown lifts the veil of secrecy around how the process works, explaining how the back-room dialers constantly call folks and work through a script to get the recipients of the call to agree to fork over money.  It’s understood that if the person picks up the phone, the longer the broker can keep the person on the phone the better the chance of selling something – no matter how bad it is.  This business is similar to the three-card-monte guy on the street, but worse: by working under the seemingly staid letterheads of large corporations, there is the impression that the callers are giving advice.  In the end, all they are doing is pushing a sale, and the guy calling you doesn’t care if it’s a good thing he’s selling you or not – only that he’s making a sale.

I found the book to be informative mostly in that it is confirmation of what I’ve learned through the years and believed to be true about these outfits.  Joshua Brown has done a great job in exposing the underbelly of the financial industry, and I believe he truly enjoys the position this has put him in.  As noted, he has been referred to as the “merchant of snark” by the New York Times for his expose’, and this snarkiness comes through in his book, making it a fun read in addition to an informative book.

If you have any involvement in the financial services industry as a profession, you probably know (or have an inkling about) many of these things already.  Brown’s insights and presentation make the book worth the read nonetheless (and you’ll probably learn a thing or two along the line).

If you use a broker to “help” with your investments, you owe it to yourself to read this book – asap.  If you have ever found yourself wondering just why it is that your “investment guy” makes one recommendation over another – you need to read this book.  If you have money invested anywhere at all other than bank CD’s, you need to read this book.  I am certain that your eyes will be opened, and you’ll be a better consumer as a result of it.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Ah, the Roth IRA. That single bastion of non-taxable money in our arsenal of accounts. When you have investments in a Roth IRA, you can take the money out tax-free, right? Not always.

There are several situations where a Roth IRA’s monies can be subjected to tax, penalty, or both.  Listed below are some of those circumstances.

When a Roth IRA is Taxable

It should be noted that contributions to a Roth IRA may always be withdrawn from the account tax-free, for any purpose whatsoever.  There are no restrictions on these withdrawals.

1.  Taking the money out of the account within the first five years of the account’s existence can result in taxation of a portion of the funds.  The portion that is taxable is any withdrawal that exceeds the total of all contributions and conversions into the account.  This rule applies without exceptions.

2.  If your Roth IRA has been in existence for the required five-year time, there are still some qualifications to meet in order to ensure that the withdrawals are completely tax free.  Specifically, you must

• be at least 59½ years of age; OR
• you must be disabled; OR
• you must be taking no more than $10,000 more than the contribution and conversion amount(s) for a first-time home purchase; OR
• the account owner has died.

If none of those qualifications applies, any amount greater than the conversion/contribution amounts will be subject to ordinary income taxation.

When a Roth IRA is Subject to Penalty

In addition to the specter of taxation, withdrawals from the Roth IRA could also be subject to a 10% early withdrawal penalty (much like a traditional IRA can be).  Here are a couple of cases when the 10% penalty may apply:

1.  Within five years of any conversion into a Roth IRA, if you take out amounts that include the converted funds, the withdrawal of the converted amounts will be subject to the 10% penalty. (unless one of the exceptions applies – see 19 Ways to Withdraw IRA Funds Without Penalty for more details)

2.  Even after the five year period has elapsed, if you are under age 59½ and none of the exceptions from #2 in the “Taxable” section above applies, any amount withdrawn that is greater than the conversions and contributions to the account will also be subject to the 10% penalty.

Wrap up

If the above is a bit confusing, you might need a refresher on the withdrawal sequence – how each dollar of withdrawal from a Roth IRA is attributed, and in what order.  Here’s how it goes:

First, all contributions to the account are withdrawn.  After that, all conversion amounts are withdrawn, starting with the amounts that have been converted for more than five years, and then subsequently any amounts that were converted less than five years ago (and therefore subject to penalty unless an exception applies).

After all conversions and contributions have been withdrawn, any growth in the account is withdrawn.  Growth occurs when the investments in the account gain in value or generate dividends and/or interest.  This money is taken out of the account last – and is the most likely to be both taxable and penalized if taken out before the stipulations above have been met.

For more detail on the withdrawal sequence, see the article Ordering Rules for Roth Distributions.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Most everyone has a monster file cabinet or file box (or dumpster?) where tax records are kept – and you find yourself wondering if keeping all this junk is really necessary…

The IRS recently published their Tax Tip 2012-71, which discusses how you should go about managing your tax records.  The actual text of the Tip is listed below:

Managing Your Tax Records After You Have Filed

Keeping good records after you file your taxes is a good idea, as they will help you with documentation and substantiation if the IRS selects your return for an audit.  Here are five tips from the IRS about keeping good records.

1. Normally, tax records should be kept for three years.
2. Some documents – such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property – should be kept longer.
3. In most cases, the IRS does not require you to keep records in any special manner.  Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.
4. Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
5. For more information on what kinds of records to keep, IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

If your income, or part of your income, is from a source other than an employer who provides you with a W2 and therefore withholds taxes on your behalf through the year, you may need to make estimated tax payments.  There are ways around this, such as having tax withheld from your pension or Social Security payments.  But for some folks, estimated tax payments are the way to get your tax paid through the year.

If your only income for the year is from withdrawals from an IRA, you don’t need to make quarterly payments, you can wait until the end of the year to withdraw the amount you need to pay in tax.  Otherwise, for most other types of income you need to pay tax as you receive it during the year.  You will make one payment in mid-April for your income through March 31; another in mid-June for income through May 31; a third in mid-September for income through August 31, and a final payment by mid-January of the following year for income to December 31.

The IRS recently published their Tax Tip 2012-65, which includes tips for people who pay estimated taxes.  Below is the text of the Tip:

Six Tips for People Who Pay Estimated Taxes

You may need to pay estimated taxes to the IRS during the year if you have income that is not subject to withholding.  This depends on what you do for a living and the types of income you receive.

These six tips from the IRS explain estimated taxes and how to pay them.

1. If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax.
2. As a general rule, you must pay estimated taxes in 2012 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and 2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return.  Special rules apply for farmers, fishermen, certain household employers and certain higher income taxpayers.
3. For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
4. To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year.  Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, for this.  You want to be as accurate as possible to avoid penalties.  Also, consider changes in your situation and recent tax law changes.
5. The year is divided into four payment periods, or due dates, foe estimated tax purposes.  Those dates generally are April 15, June 15, September 15, and January 15 of the next or following year.
6. Form 1040-ES, Estimated Tax for Individuals, has everything you need to pay estimated taxes.  It includes instructions, worksheets, schedules and payment vouchers.  However, the easiest way to pay estimated taxes is electronically through the Electronic Federal Tax Payment System, or EFTPS, at www.irs.gov.  You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

For more information on estimated taxes, refer to Form 1040-ES and its instructions and Publication 505, Tax Withholding and Estimated Tax.  These forms and publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).