Glossary: Estimated Tax Payments

calculator-178127_1280Estimated tax payments are quarterly payments made by taxpayers who have income but no tax withholdings during the year.

Self-employed taxpayers, people with investment income, and people with a large amount of other income may need to make estimated tax payments.

Compare this to an employee who has wages from a job. Taxes are withheld from those wages, so a taxpayer in that situation likely won’t need to worry about estimated tax payments.

When that employee files their tax return, the withholding helps cover the tax owed, often generating a refund or at the very least, lessening the amount of additional tax the taxpayer has to shell out.

But someone who’s self-employed doesn’t have “wages” and thus has no withholdings. Estimated tax payments are a way of cushioning the blow at tax time.

Example

John is self-employed. His income for the year results in a tax liability of $15,000. Since John has no “wages” for withholding to be taken from, he has two choices: 1) come up with $15,000 at tax time, or 2) make estimated tax payments to cover his tax liability and lessen the amount that he has to shell out at once.

Marriage in the Tax Code, Part 14: The Marriage Penalty Gets Worse Through the 1970s

wedding-rings-150300_1280In future parts of this series, I’ll examine the social and legal landscape that may have led to the marriage penalty. But first I want to give some more examples.

By the early 1980s, the marriage penalty started affecting couples at lower income ranges.

Example

In 1982, John has taxable income of $14,000 and Jane has taxable income of $6,000, for combined taxable income on their married filing jointly tax return of $20,000. The tax on $20,000 is $2,773.

If John and Jane were single, John’s tax would be $2,100. Jane’s tax would be $528. Total tax owed between the two of them is $2,628.

Marriage would cost John and Jane would pay an additional $145 in taxes.

For context, $1 in 1982 is equal to approximately $2.38 today. So $14,000 is the equivalent of $33,300 today; $6,000 is the equivalent of $14,300 today; and $145 is the equivalent of $345 today.

In other words, John and Jane face a marriage penalty when their combined income is just $47,000.

Now let’s fast forward to 1988, when new tax brackets took effect after the tax reforms of 1986.

In 1988, John has taxable income of $25,000 and Jane has taxable income of $8,500, for combined taxable income of $33,500. Their total tax liability is $5,513.

If John and Jane were single, John’s tax liability would be $4,680, Jane’s tax liability would be $1,275, for a total tax liability of $5,955. There is no marriage penalty at their income level. For reference, $33,500 of income is equal to $65,000 today. The tax reform of 1986 eliminated the marriage penalty at the lower income levels.

The marriage penalty did still exist, but only at higher income levels. In running projections, I had to up John and Jane’s income to the equivalent of $116,000 in today’s dollars before the marriage penalty applied.

One thing that helped ease the marriage penalty was the fact that the tax brackets were simple in 1988. Here’s what the bracket looked like:

Married Filing Jointly Single
Marginal Tax Brackets Marginal Tax Brackets
Tax Rate Over But Not Over Tax Rate Over But Not Over
15.0% $0 $29,750 15.0% $0 $17,850
28.0% $29,750 28.0% $17,850

But as the years passed, more levels were added back to the tax brackets, and the marriage penalty made a comeback at lower income levels.

Who Claims the Kids When a Single Parent Dies Mid-Year? Part 2

Tax situations often turn into complex mazes.
Tax situations often turn into complex mazes.

Here’s the scenario and question I pondered in Part 1:

Husband and wife have 4 kids. The wife passes away. Five years later, the husband unexpectedly dies.

Two of the kids are adults in their 20s, but the other 2 kids are teenagers under the age of 18 and still in high school. The oldest 20-something gets custody of the teens.

In the year the father died, who claims the teens: the deceased father on his final tax return, or the eldest adult child who now has custody?

Analysis: Qualifying Child or Qualifying Relative?

Both of the teens are clearly still qualifying children. They’re under age 19 and still in high school. So, we’re going to look at the qualifying child rules to see what tax law can tell us about this situation.

Qualifying Child: Step-by-Step

Rule 1: The child must be the taxpayer’s child, grandchild, brother or sister.

Advantage: Tie. Both the deceased father and the eldest adult child meet this rule.

Rule 2: Must live with the taxpayer more than 1/2 of the year.

Advantage: It depends. See further discussion below.

Rule 3: The child is under age 19 at the end of the tax year, or under age 24 if a college student.

Advantage: Tie. The teens are under age 18 and still in high school. They clearly meet this rule and it doesn’t play into our analysis.

Rule 4: The child must not provide more than 1/2 of THEIR OWN support.

Advantage: Tie. Note that the rule states that the child cannot provide more than 1/2 of their own support. For our analysis, it doesn’t matter if the deceased father or the eldest child provided more support. Also, for our analysis, assume that the teens didn’t provide more than 1/2 of their own support.

Rule 5: The child is not married.

Advantage: Tie. The teens are not married.

Analysis: It All Comes Down to the Abode Test

The tiebreaker here is, who did the teens live with for more than 1/2 the year. Which means, it depends on when the father died.

If he died in the first half of the year (before July 1st), then he couldn’t claim the teens on his final return because they didn’t live with him more than half the year.

If he died in the last half of the year, then ONLY he would be entitled to claim the teens, because they would have lived with him more than half the year.

Marriage in the Tax Code, Part 13: Examples of the Marriage Penalty in the Early 1970s

wedding-rings-150300_1280Here are some examples of the marriage penalty that came about in 1971.

Us tax pros generally say the marriage penalty doesn’t apply at the lower ends of the tax brackets. That’s generally true now, and it was generally true in 1971. A typical middle class couple would not face the marriage penalty.

Example

In 1971, John and Jane are unmarried. John has taxable income of $8,000. Jane has taxable income of $1,000. John’s tax liability will be $1,590. Jane’s will be $145. Combined, that equals $1,735.

Now let’s say John and Jane are married. The tax on a joint tax return showing $9,000 of taxable income is $1,600. There is no marriage penalty at their income level.

($1 in 1971 is equal to $5.67 today. So $9,000 of income is approximately $51,000 today.)

Then as now, the marriage penalty applied mainly to cases where a couple both had taxable income.

Example:

In 1971, John and Jane have taxable income of $8,000 each (equal to about $45,000 each today) for total taxable income of $16,000 on their joint tax return. The tax on $16,000 for a married couple is $3,260.

If they were unmarried and filing as two single people, they would owe $1,590 of taxes each, or $3,180 of total taxes. That’s a marriage penalty of $80, or about $450 in today’s dollars.

Through the years, the marriage penalty would get worse, as we’ll explore in Part 14.

Who Claims the Kids When a Single Parent Dies Mid-Year? Part 1

Tax situations often turn into complex mazes.
Tax situations often turn into complex mazes.

Real-life scenario:

Husband and wife have 4 kids. The wife passes away. Five years later, the husband unexpectedly dies.

Two of the kids are adults in their 20s, but the other 2 kids are teenagers under the age of 18 and still in high school. The oldest 20-something gets custody of the teens.

In the year the father died, who claims the kids: the father on his final tax return, or the eldest child who now has custody?

Analysis

First, let’s look at what tax law says. 

Section 152 of the Internal Revenue Code defines the term “dependents.” A dependent falls into one of two categories:

  1. A qualifying child, or
  2. A qualifying relative

Qualifying Child

A qualifying child is:

  1. A taxpayer’s child, grandchild, brother, sister, step-brother or step-sister
  2. Lives with the taxpayer more than 1/2 of the year
  3. Is under age 19 at the end of the tax year, or under age 24 at the end of the tax year if the child is a student
  4. A child who does not provide more than 1/2 OF THEIR OWN support
  5. The child is not married, or if they are married, does not file a joint tax return with their spouse (except in certain cases involving the earned income credit).

Qualifying Relative

A qualifying relative is:

  1. Someone whose gross income is below the personal exemption amount for the year (for example, below $3,950 in 2014)
  2. The taxpayer must provide more than 1/2 of the person’s support
  3. The relative cannot qualify someone else’s qualifying child

Additionally, someone who’s not a blood relative must live with the taxpayer all year in order for the taxpayer to claim that person as a dependent.

In Part 2, I’ll analyze how this applies to the scenario posed at the beginning of this post.

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