It’s September. So what am I doing talking about estimating your income tax?
This is the time to calculate what you’re going to owe and make adjustments in your payroll withholding and estimated tax payments.
You know you’ve estimated right when you don’t pay much or get much back in a refund.
So I spent a little bit of time looking at income tax estimators online. I like the one here
You will need to know a little bit of the ‘buzz words’ to make it work, though.
Here are some of the income tax estimator basics:
All business structures, except for the C Corporation, flow through to your individual income tax return. So, if you have a business (and it’s not in a C Corporation), you’ll have to report on your personal return and that means you have to calculate using the an Individual Income Tax Estimator. That’s a fundamental piece that sometimes confuses people. Even if you have a dozen businesses, if they all flow through, you calculate your estimated taxes just as if you were a W-2 employee for someone else.
Our tax system is bracketed. As your income goes up, you move to higher brackets, but the lower ones are still in place. That’s why we talk about marginal tax rate and overall average tax rate, and the numbers will almost always be different.
Marginal tax rate: The next dollar you are taxed will be taxed at this amount.
Average tax rate: The total tax you paid divided by your taxable income.
You’d think this would be straightforward – you’re married or you’re not. But it really isn’t that simple either. If you were widowed in the year, then you can claim married status for the year. You can claim as qualified widow(er) for the next year too if you have a dependent child and had previously claimed married filing jointly.
You’ll find that married filing jointly is almost always going to result in less tax. Most people use married filing separately if there is a legal reason to keep income separate.
Unless the Bush Tax Cuts are extended, we’re going to see the marriage tax penalty come back. That means that if you and your spouse were single, you would pay less tax then you do with the same income and by being married. You can’t defeat the marriage tax penalty by filing separately.
One more item that you’ll need to determine before you can use any income tax estimator: dependents.
You may want to check with your tax advisor and/or the irs.gov website for the particulars in your case. The simple rule is that you need to provide more than half the support for an individual to claim them as a dependent. There are also rules about whether you are related to them and if they live with you. You can’t claim someone as a dependent who lives in another country.
I love using a good income tax estimator for calculating tax, but remember the answer you get is only going to be as good as information you put in. That’s where you might need to get a little expert advice.