a. Erratic Income Each Year
If your only source is a fixed wage, this topic is not an issue for you. However, if you have a large bonus coming this year, or your private equity investment has a big distribution, or your rental income jumped this year because you just bought and rented out two big properties, etc. it is going to be very hard to estimate accurately your income.
b. 3 Tax Systems
Set aside the income fluctuations, the taxes systems you are dealing with also are pretty complicated -
First, you need to deal with the 3.8% Medicare tax, the regular income tax, and Alternative Minimum Tax (AMT). Second, you need to look at all of the itemized deductions, phaseouts, credits, etc. in order to determine the estimated tax payments. In short, you better run a complete quarterly return in order to get everything right.
c. Add State Taxes
State taxes don't make the process easier. While some states follow the IRS payment system, for states have their own rules. For example, California requires taxpayers to pay 30% of their estimated taxes in the first quarter, 40% in the second quarter, none in the third quarter, and 30% in the final quarter.
However, don't be scared by the above complications. In our next blog post, we will show some easy ways you could still get the estimated tax problem solved.