Estimated Tax Series Part 1: What Are Estimated Taxes?

May 18, 2015

The Indiana income tax system is basically a “pay-as-you-go” system. Taxes are automatically taken out of our paychecks. However, if you have income from non-wage sources, such as from dividends, interest, farm income, or rental income, no taxes are withheld. The “pay-as-you-go” requirement still applies.

If you have income not subject to withholding tax, or if you don’t have enough tax withheld from your income, you will need to make estimated tax payments if you wind up owing more than $1,000 to the state when you file your taxes.

Instead of paying taxes throughout the year, estimated payments are made in equal installments due in April, June, September, and January (of the next year.) For someone who estimates owing $1,224 in tax, he will make four estimated tax payments of $306 each. This will pay the tax he owes as the year progresses.

What do you need to pay?

To figure your estimated tax, you are tasked with estimating how much income you are going to make during the year and then figuring how much tax is due on that amount.

If you receive steady payments each month, such as taxable pension income, you have a good idea how much income you’ll make for the entire year. For example, if you receive $3,000 a month, you’ll get $36,000 for the year ($3,000 each month X 12 months in a year). Multiply $36,000 by the current state tax rate (.033 for 2015) to find you owe $1,188.

Another example is farm income. It can be challenging to estimate your income when you don’t start seeing those checks come in until the crops and livestock are sold or the rental income comes in. For many, this occurs at the end of the year and trying to make an educated guess ahead of time can be difficult.

How can you estimate your income when you have no clue how your business will do? Maybe you’ve recently retired and don’t know how your tax picture will look.

For these answers and more, check back in a few days for “Estimated Taxes Part Two: How much estimated tax do you need to pay?”