Quarterly tax payments are required of all US taxpayers who are at risk for underpaying their tax liability on their expatriate tax return throughout the year. The ideal situation for US taxpayers is to have a zero tax liability at the end of the year. Receiving a refund at the end of the year means that you overpaid your tax liability and provided the government with an interest-free loan. If you have a balance due, it means that you did you not pay enough taxes throughout the year and are required to have the full balance paid by April 15th. The latter circumstance is not typically ideal. Many taxpayers in this situation do not expect to owe and the resulting tax liability may create a hardship. In addition, if the Internal Revenue Service (IRS) sees a trend in underpayment, they will require quarterly estimated tax payments.
Who is Required to Make Estimated Tax Payments?
All US taxpayers are held to the same requirements for making estimated tax payments, whether they are living on US soil or abroad. If you expect to owe at least $1,000 at the time of filing your US expatriate tax return, then you are required to make estimated tax payments. Taxpayers required to make estimated payments are generally self-employed, substantial investors or employed by a foreign entity that does not withhold or pay taxes on behalf of their US employees. Failing to make the required payments toward your expatriate tax return can result in an underpayment penalty. This penalty is based on current market rates, and is assessed based on the amount of tax underpaid and the number of days the payment was delinquent.
As is the case with most tax laws, there are exceptions to this rule. You will be exempt from the underpayment penalty on your expatriate tax return if you:
- have paid at least 90% of the tax that you owe for the current year, or
- have paid 100% of your tax liability from the prior year.
For example, assume that you had a total tax liability of $2,500 on your 2010 expatriate tax return. To avoid the underpayment penalty, you will need to pay at least $2,500 against your 2011 taxes (in the form of estimated tax payments, withholdings, or other credits) throughout the 2011 calendar year. However, if you only paid $2,000 against your 2011 taxes, but your total 2011 tax liability was only $2,200. You will have paid at least 90% of your total 2011 expatriate tax return liability so will also be exempt from the underpayment penalty.
How Do I Know How Much to Pay?
To determine that amount of tax payable each quarter, an estimated expatriate tax return will need to be prepared to calculate the total forecasted tax liability. Credits or deductions that you expect to receive will be excluded when calculating your taxable income. Visit our website for more information about taking advantage of the Foreign Earned Income Exclusion on your expatriate tax return. Form 1040-ES, available on the Internal Revenue Service website, contains worksheets within the instructions that are helpful in completing this process. The dollar amounts need only be reasonable estimates of your expatriate tax return. They do not need to be exact.
Let’s use Edward Expatriate as an example. Edward, a single US citizen, has lived and worked in London for eight years. He is subject to the British social security system and pays income taxes to HM Revenues and Customs. He makes approximately $180,000 USD annually. Edward’s quarterly expatriate tax return payments will be calculated as follows:
If you are self-employed and not subject to a foreign country’s social security system, you will be subject to US self-employment taxes in addition to your regular income tax. For 2011, the self-employment tax rate is 13.3% and is assessed based on the gross self-employment earnings reported on your expatriate tax return. If you are required to pay self-employment taxes, you will want to make sure to consider this additional tax when calculating your quarterly payment.
Make Estimated Tax Payments for Expatriate Tax Return
Estimated taxes may be paid monthly, but should be paid no less frequently than once a quarter. You can pay electronically via the Electronic Federal Tax Payment System (EFTPS) or you can mail a check directly to the IRS. If you choose to mail a check, download and complete the payment coupons (Form 1040-ES) from the IRS website to ensure payments are appropriately applied to your expatriate tax return. Attach your check and mail directly to the IRS Service Center. Keep copies of the coupons or cancelled checks, as this will be helpful information to have prior preparation of your expatriate tax return.
If you prefer to pay electronically, go to the EFTPS website and complete the steps to enroll. Registering online is a quick process, generally taking no longer than ten minutes. However, after the initial enrollment step is complete, a PIN number required to complete the process will be mailed via US postal mail within seven business days. Paying electronically is beneficial because you do not risk losing payments in the mail, and payment history can easily be accessed when you file your expatriate tax return at the end of the year.
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