Overview:
US citizens who live and work abroad are subject to an annual US tax filing requirement on their worldwide income. This may mean a tax liability in your resident country as well as in the US. Many Americans are surprised to learn they have additional US tax liability. Making an estimated tax payment will help you avoid additional underpayment penalties. The IRS is a pay-as-you-go system- meaning they expect to receive payments throughout the year. The IRS may assess an additional underpayment penalty, even if you are due a refund when you file your tax return.
Who Must Make Estimated Tax Payments?
Have a quick glance at your 2021 US tax return. Specifically, look at the following lines of your 2021 Form 1040 pages 1 & 2:
1. Line 37: Amount you owe — If this amount is above $1,000 this would be a clue that you may need to make an estimated tax payment.
2. Line 11: Adjusted Gross Income (AGI):
a. Below $150,000: you need to pay either 90% of 2021 income tax liability OR 100% of 2020 tax liability
b. Above $150,000: make a payment of 110% of your 2020 tax liability of 90% of your 2021 income tax liability
3. Line 24: Total Tax- Use this amount to calculate your estimated tax payment based on your prior tax return, either 100% or 100% depending on your AGI
a. You may need to work with your accountant or financial planner to help you estimate your 2022 income tax liability before fully preparing and filing your 2021 return
* Even if you made estimated tax payments between 90–110% of your prior tax liability you may still have an additional tax bill due- this happens anytime your overall income increases significantly from one year to the next or if you have income that does not have foreign tax credits to offset the US tax liability. Making estimated tax payments will still help to reduce or eliminate an additional underpayment penalty.
How Do I Make the Payment?
Quarterly estimated tax payments are meant to be paid on the IRS schedule of April 18, June 15th, September 15th, and January 17th. The IRS accepts the payment in the following ways:
Mail-in your voucher and check by mail
Pay online
Pay by phone
Pay using the IRS2Go app
If you are only making one payment for January 17th expect that it will be significantly larger than if you had broken payments up with the payment schedule.
Tracking your estimated tax payments
If you make an estimated tax payment be sure to keep a record of:
1. The date of the payment
2. The amount of the payment
3. The payment method
When you prepare your return, be sure to claim a credit for the estimated tax payments you have already made. If you do not keep accurate records, it may take longer to process your return.
Ask for help
If you do not know how to review your prior year return, or if you have questions about how to calculate your 4th quarter estimated tax payment. Please feel free to reach out to me, Arielle Tucker, EA & CFP®. I help US citizens (and their families) optimize their tax situation while living fulfilling lives in Europe.