It’s become an annual rite of passage for my financial life. Each May for the past decade, I’ve come to expect a tax refund from the IRS. Some years, the refund has been a couple hundred dollars; other years, it’s been comparatively large – the year my husband and I had our first child, our federal tax refund was an astonishing $5400, leading us to adjust our withholding to put more of that money in our pockets week to week.
This year, however, I won’t open my mailbox one May morning (we’re notoriously last-minute filers, largely due to the fact that my dad – a CPA and my tax preparer – does our returns dead last, after all his paying clients) to find a refund check. Instead, I’ll be sending a rather large check to Uncle Sam by the April 15th deadline. That’s right, this year, I’m getting a tax bill instead of a tax refund… and it stinks.
The Origins of My Tax Bill
Our tax refund wasn’t replaced with a tax bill on any error on our part. We didn’t miscalculate on our withholding or anything like that. Rather, I more than doubled my targeted earnings for 2012, and since I work freelance, I’m responsible for paying my income and payroll taxes myself.
What About Estimated Quarterly Taxes?
I didn’t have to pay estimated quarterly taxes in 2012, although you may be wondering how I managed to avoid them. According to the IRS, you don’t have to pay these quarterly taxes if you meet all three of the below criteria:
- You had no tax liability for the previous year (in this case, my 2011 tax return)
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12-month period
However, my tax liability for 2011 was not zero, disqualifying me from this set of standards.
I’ve done the math, though, and figured out that I’ll owe the government a tax bill of about $950. And, according to the IRS:
“If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.”
In other words, because I will owe less than $1,000 in taxes, I wasn’t required to make estimated quarterly tax payments (that doesn’t mean I couldn’t make those payments, though, if I’d wanted to, hence avoiding the big tax bill during tax season).
Will We Avoid A Tax Bill in 2014?
Unless I move to a standard W-2 job or see a precipitous drop in my income over the next 12 months, it’s unlikely I’ll be able to avoid a tax bill in 2014 (for the 2013 tax year). In fact, if my workload increases even slightly, it’s very likely I’ll find myself required to pay estimated quarterly taxes.
I’m kind of sad that I won’t be getting a refund this year. In the past, my husband and I have always used this “free money” to do things like pay down debt (we used the check to pay off our remaining vehicle loan last spring) or boost our emergency fund. This year, we really could have used a tax refund to increase our savings for a down payment on our next home. I do realize that a tax refund is a refund of money owed to me – it’s not really “new” income, and if I was due a refund this spring, it would naturally mean I had less money in my savings account right now.
Are you due a tax refund this year? Or will you have to pay your taxes before the April 15th deadline?