As she stood at the mailbox, Suzanne’s face went pale when she saw the return address: Department of the United States Treasury, Internal Revenue Service, Official Business. A chill traveled down her spine, a feeling that reminded her of the day she stood in front of the judge as he finalized her divorce. That was 18 months ago, yet it felt like yesterday. Trying not to panic, Suzanne nervously tucked the letter behind her bundle of junk mail as she walked back into the house. Her thoughts raced. What now? Am being audited? I never handled the tax returns! This is all Dan’s fault, the bastard!
Suzanne sat down at the kitchen table, staring at the unopened letter, the official business letter. With a deep breath, she tore open the envelope, trying to stay calm. She read the words slowly, processing each one carefully. Underpayment penalties. Confusion set in; she had filed last year’s tax return claiming all her income and even received a substantial refund. What had she missed?
Unbeknownst to Suzanne, alimony is income subject to state and federal income tax. If you are receiving alimony, you are expected to pay quarterly estimated tax payments on that income. Further, if you are separated, meet certain requirements, and are not yet divorced, you must still report alimony income on your state and federal tax returns when you file them. The American tax system requires that you pay your taxes as you earn income throughout the year. If you did not pay enough tax as Suzanne had, either through withholding or by making timely estimated tax payments, you will have underpaid your estimated tax and may have to pay a penalty (Underpayment Penalties).
According to the IRS, you must make Estimated Tax Payments in 2011 if:
You expect to owe at least $1,000 in tax for 2011, after accounting for your withholding and refundable credits AND
You expect your withholding and refundable credits to be less than the smaller of:
90% of the tax expected on your 2011 return OR
100% of the tax shown on your 2010 return
If you are employed, the tax withholding from your paycheck pays into the system for you.
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