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The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go.
Withholding. If you are an employee, your employer probably withholds income tax from your pay. In addition, tax may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. The amount withheld is paid to the Internal Revenue Service (IRS) in your name.
Estimated tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rents, and royalties. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.
This publication explains both of these methods. It also explains how to take credit on your return for the tax that was withheld and for your estimated tax payments.
If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Generally, the IRS can figure this penalty for you. This underpayment penalty, and the exceptions to it, are discussed in chapter 4.
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Use your 2013 tax return as a guide in figuring your 2014 estimated tax, but be sure to consider the following.
Standard mileage rates. The 2014 rate for business use of your vehicle is 56 cents per mile. The rate for use of your vehicle to get medical care or move is 23½ cents per mile. The rate of 14 cents per mile for charitable use is unchanged.
Personal exemption increased for certain taxpayers. For 2014, the personal exemption amount is increased to $3,950 for taxpayers with adjusted gross income at or below $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, or $152,525 if married filing separately. The personal exemption amount for taxpayers with adjusted gross income above these thresholds may be reduced.
Limitation on itemized deductions. For 2014, itemized deductions for taxpayers with adjusted gross income above $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, and $152,525 if married filing separately may be reduced.
Health care coverage. When you file your 2014 tax return in 2015, you will need to either (1) indicate on your return that you and your family had health care coverage throughout 2014, (2) claim an exemption from the health care coverage requirement for some or all of 2014, or (3) make a payment if you do not have coverage or an exemption(s) for all 12 months of 2014. For examples on how this payment works, go to www.IRS.gov/aca and click under the “Individuals & Families” section. You may want to consider this when figuring your “Other taxes” on Line 12 of the 2014 Estimated Tax Worksheet (Worksheet 2-1). For general information on these requirements, go to www.IRS.gov/aca.
Advance payments of the Premium Tax Credit. If you buy health care insurance through the Health Insurance Marketplace, you may be eligible for advance payments of the Premium Tax Credit to help pay for your insurance coverage. Receiving too little or too much in advance will affect your refund or balance due. Promptly report changes in your income or family size to your Marketplace. You may want to consider this when figuring your estimated taxes for 2014. For more information, go to www.IRS.gov/aca and see Publication 5120 and Publication 5121.http://www.IRS.gov/pub5120
Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount is increased to $52,800 ($82,100 if married filing jointly or qualifying widow(er); $41,050 if married filing separately).
Retirement savings contribution credit income limits increased. In order to claim this credit for 2014, your MAGI must be less than $30,000 ($60,000 if married filing jointly; $45,000 if head of household).
Adoption credit or exclusion. The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $13,190. In order to claim either the credit or exclusion, your MAGI must be less than $237,880.
Three or more children lived with you and you earned less than $46,997 ($52,427 if married filing jointly),
Two children lived with you and you earned less than $43,756 ($49,186 if married filing jointly),
One child lived with you and you earned less than $38,511 ($43,941 if married filing jointly), or
A child did not live with you and you earned less than $14,590 ($20,020 if married filing jointly).
Also, the maximum MAGI you can have and still get the credit has increased. You may be able to take the credit if your MAGI is less than the amount in the above list that applies to you. The maximum investment income you can have and get the credit has increased to $3,350.
Future developments. The IRS has created a page on IRS.gov for information about Publication 505 at www.irs.gov/pub505. Information about any future developments affecting Publication 505 (such as legislation enacted after we release it) will be posted on that page.
Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
Additional Medicare Tax. Beginning in 2013, a 0.9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. You may need to include this amount when figuring your estimated tax. See the instructions for line 12 of the 2014 Estimated Tax Worksheet. You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4, Employee's Withholding Allowance Certificate. For more information on Additional Medicare Tax, go to IRS.gov and enter “Additional Medicare Tax” in the search box.
Net Investment Income Tax. Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. NIIT may need to be included when figuring estimated tax. See the instructions for line 12 of the 2014 Estimated Tax Worksheet. You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4. For more information on NIIT, go to IRS.gov and enter “Net Investment Income Tax” in the search box.
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