Estimated Tax Payments for Americans Abroad
All U.S. taxpayers are required to make quarterly tax payments. This may be especially important for expatriates, who often risk underpayment throughout the year. It is beneficial for a taxpayer to have a zero tax liability so that he can receive the greatest refund possible at the end of the year. Expecting a refund and instead having to pay causes hardship for many Americans every year. If a balance is due, it must be paid in full by April 15th in order to avoid a penalty.
Who is Obligated to Make Estimated Tax Payments?
The requirements for estimated tax payments are the same for all U.S. taxpayers, and there is no differentiation between stateside Americans and those living abroad. If it is likely that you will owe more than $1,000 by April 15th, you should be making quarterly payments on this amount. Taxpayers most often affected are investors, self-employed or contract employees. If you fail to make the required quarterly payments, you may be charged with a penalty for underpayment. This penalty will be based on the current interest rates and will vary depending on the amount owed and the number of days the debt is/was delinquent.
Of course, as is the case with almost all tax laws and situations, there are exceptions and exemptions to this penalty. You will not be charged an underpayment penalty if you have paid either 90% or more on the current year's tax liability or have paid 100% of what was owed in the previous year.
To make this clearer, let's assume that you owed $2,500 in 2010. If, in 2011, you have paid (throughout the year in the form of estimated payments, credits and withholdings) $2,500, you will have paid 100% of the previous year's liability and will therefore not be penalized even if your 2010 liability is higher than what you owed in 2011 (and therefore what your estimated to pay).
How Do I Know What to Pay?
Determining how much to pay is no small task. An estimated tax return should be prepared in order to calculate the predicted liability. This way, all deductions and credits afforded you can be excluded from your taxable income. Located in the IRS website is Form 1040-ES. This form and coinciding worsheets will help you to complete the process of estimating your owed taxes. Keep in mind that the information you provide on these forms does not need to be 100% accurate but rather the best estimate that can be given at the time.
A self-employed expatriate who is not obligated to a foreign government's social security system will instead be required to pay U.S. self-employment taxes on top of standard income tax. The 2011 tax rate for self-employment is 13.3%. This is assessed from gross earnings reported on your expatiate return. If required to pay this additional self-employment tax, it should be included when making your quarterly payments.
How do I Make a Payment?
Estimated tax payments can be made monthly, but should be made at least once a quarter. You can make these payments electronically by using the Electronic Federal Tax Payment System (EFTPS). Registering with the EFTPS is simple, but a PIN number will be required before a payment can be made. This PIN will be mailed from the IRS Service Center and will take a minimum of seven days to arrive. After completing the registration process, all payments can be made safely, quickly and securely online. Additionally, your payment history will be saved and easily accessible when needed at the end of the tax year.
If you prefer a more hands on approach, you can mail a check directly to the IRS. If you choose to mail a check, first complete the payment forms (1040-ES) from the IRS website to ensure that your payments are accurately applied. Attach your check to the forms and mail your payment to the Service Center of the IRS. Be sure to keep copies of this information as it will be necessary when completing your yearly expatriate return.
I.J. Zemelman, EA is the founder of Taxes for Expats