New, changed and expired provisions affect 2011 individual estimated tax

Apr. 18, 2011 is the due date for affected calendar year taxpayers to make their first installment of 2011 estimated tax. There aren't any changes in the estimated tax rules themselves for 2011. However, there are a number of new, changed and expiring provisions that will affect some individuals' estimated tax computations for 2011. This alert provides a brief overview of the estimated tax rules for individuals and looks at the changes that may impact 2011 estimated taxes.

Who needs to pay estimated tax. Individuals who have income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.) must pay estimated tax or face a penalty. In addition, taxpayers who do not elect voluntary withholding on certain types of income, such as unemployment compensation and the taxable part of social security payments, also may have to pay estimated tax on those items or face a penalty. (Code Sec. 6654)
When and how much to pay. For 2011 estimated tax, in general, a taxpayer must pay 25% of a “required annual payment” by Apr. 18, 2011, June 15, 2011, Sept. 15, 2011 and Jan. 17, 2012 to avoid an underpayment penalty. (Code Sec. 6654(c))
The required annual payment for most taxpayers is the lower of 90% of the tax shown on the 2011 return or 100% of the tax shown on the 2010 return, even if filed late (“prior year exception”). However, a taxpayer (other than a farmer or fisherman) whose adjusted gross income on his 2010 return is over $150,000 (over $75,000 if married filing separately) must pay the lower of 90% of his 2011 tax or 110% of his 2010 tax. The prior year exception does not apply for a taxpayer who did not file a 2010 return or filed a 2010 return that did not cover 12 months. (Code Sec. 6654(d))
Other exceptions to penalty. There's no underpayment penalty if the tax shown on the return (after withholding) is less than $1,000. Estimated tax does not have to be paid for 2011 if the taxpayer was a U.S. citizen or resident alien for all of 2010 and had no tax liability for the full 12-month 2010 tax year. (Code Sec. 6654(e))
Annualized method. A taxpayer who, after Mar. 31, 2011, has a large change in income, deductions, additional taxes, or credits that requires him to start making estimated tax payments should use the annualized income installment method. While the due dates will not change, the payment amounts will vary based on the taxpayer's income, deductions, additional taxes, and credits for the months ending before each payment due date. As a result, this method may allow the taxpayer to skip or lower the amount due for one or more payments. A taxpayer who uses the annualized method should be sure to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with his 2011 tax return to indicate to IRS how he has computed his payments, even if no penalty is owed. (Code Sec. 6654(d)(2))
Farmers and fishermen. Special estimated tax rules apply to farmers and fishermen.