Many taxpayers, especially those with income streams that are inconsistent, use the Annualization Method to make their estimated tax payments. For federal tax purposes, it’s relatively easy. You take the year-to-date income through the period end (March 31st, May 31st, August 31st, or December 31st), annualize it, compute the annual tax, and then pro-rate it for the tax payment that’s due. But how do you work the Annuzliation Method in California, when the first payment (due April 15th) is for 30% of the tax?
The Franchise Tax Board has come out with an article with the answer. For those who do not use the Annualization Method, 30% of the tax is due on April 15th, 40% is due on June 15th, nothing is due on September 15th, and 30% is due on January 18, 2011. For taxpayers using the Annualization Method, 27% is due on April 15th, 63% is due on June 15th, 63% is due on September 15th, and 90% is due on January 18, 2011.
The Franchise Tax Board also had good news for taxpayers who made estimated payments using the old 25% rule for the first three estimated payments of 2009.
The good news is R&TC Section 19136(g) prevents the imposition of a penalty for underpayment of estimated tax if the underpayment was created or increased by a law chaptered during and operative for the same taxable year. Since the amendments to R&TC Section 19136.1 by ABX4 17 with respect to the percentages for the annualized method were enacted in 2009 and operative for the 2009 taxable year, no penalty for underpayment of estimated tax can be imposed if the underpayment was created or increased by the changes made by ABX4 17…If an underpayment of estimated tax exists due to the changes to the annualized percentages for the first three estimated tax payments, you may request a waiver or reduction of the underpayment of estimated tax penalty by completing Part I of Form 5805.
Do note that this exception, in existence for 2009, will not work for 2010. The law changing California’s estimated tax payments to 30%-40%-0%-30% passed in 2009. At the rate the Bronze Golden State is going, we’ll soon be required to pay 100% of our estimated tax in April.
Tags: FTB