Estimated Taxes – Definition

Estimated Tax Definition

Estimated tax is an estimated amount that is paid periodically on one’s earned income to cover the tax liability. Estimated tax is calculated for those income sources that are not directly subject to withholding taxes, such as dividend earnings, self-employment income, rental income, interest income, and capital gains etc.

A Little More on What are Estimated Tax

Federal and state government requires everyone to pay taxes on the income that they earn. For instance, employees of the company are subject to withholding taxes which are deducting directly from the salaries and based on a W-4 Form.

Some people are not directly subject to withholding taxes, so they need to estimate the tax liability on their income and pay taxes to the federal and state governments. These people include self-employed individuals, investors who are earning dividends, interest income on financial instruments, or capital gains, and landlords who receive rental income. Unemployment compensation, retirement benefits, and part of social security benefits are other examples of income that require calculating estimated tax.

Estimated taxes are often paid on quarterly basis. The installment payments become due on Apr 15, June 15 and Sep 15 of the current year and Jan 15 in the next year.
Penalties may be imposed on individual’s income if her estimated taxes are not equal to at least 90% of the actual taxes. A

References for Estimated Tax

Academic Research on Estimated Tax

●      Are estimated tax elasticities really just tax evasion elasticities? The case of charitable contributions, Slemrod, J. (1989). The Review of Economics and Statistics, 517-522. This paper uses data from tax returns that have been subject to intensive audits to confront the quantitative importance of misreporting for the estimated tax responsiveness of charitable contributions.

●      Differential taxation and tax evasion by small business, Joulfaian, D., & Rider, M. (1998). Differential taxation and tax evasion by small business. National Tax Journal, 675-687. This paper examines the compliance pattern of small businesses, using pooled 1985 and 1988 Taxpayer Compliance Measurement Program (TCMP) data.

●      Optimal bond trading with personal tax: Implications for bond prices and estimated tax brackets and yield curves, Constantinides, G. M., & Ingersoll Jr, J. E. (1982). The Journal of Finance37(2), 349-352.

●     Undocumented Immigrants in Iowa Estimated Tax Contributions and Fiscal Impact, Pearson, B., & Sheehan, M. F. (2007). This report examines undocumented immigrants in Iowa and their state tax contributions. Undocumented immigration remains a controversial issue in the United States, especially as the failure of federal immigration legislation has contributed to what the National Conference of State Legislatures (NCSL) describes as “an unprecedented level of activity” in state legislative bodies as states seek to develop their own policy solutions to the issue of undocumented immigration.

●      The interrelationship between estimated tax payments and taxpayer compliance, Feltham, G. D., & Paquette, S. M. (2002). Journal of the American Taxation Association24(s-1), 27-45. This paper examines taxpayers’ compliance behavior and the tax agency’s audit decision in a broader, more realistic, setting. Whereas prior research has taken the taxpayer’s prepayment position as exogenous, this study extends the literature by incorporating the estimated tax payment decision into a tax compliance game.

●      Tax avoidance and the deadweight loss of the income tax, Feldstein, M. (1999). Review of Economics and Statistics81(4), 674-680. This paper analyses the deadweight loss of income tax, as well as tax avoidance rate in the United States.

●      California Land Conservation Act of 1965: landowner participation and estimated tax shifts, Carman, H. F., & Polson, J. G. (1971). Calif Univ Ext Inform Ser Agr Econ.

●      Estimating property tax capitalization: A critical comment, King, A. T. (1977). Journal of Political Economy85(2), 425-431.

●      Tax effects on foreign direct investment in the United States: Evidence from a cross-country comparison, Slemrod, J. B. (1990). In Taxation in the global economy (pp. 79-122). University of Chicago Press. This paper investigates the means of funding for the foreign direct investment in the United States. This paper investigates the effect of both U.S. and home country taxation on FDI in the United States. It does this by first extending and updating the standard model of aggregate FDI in the United States and then disaggregating FDI by the country of the investing firm so as to facilitate the study of home country influences, including taxation.

●      An evaluation of alternative measures of corporate tax rates, Plesko, G. A. (2003). Journal of Accounting and Economics35(2), 201-226. This paper examines the ability of financial statement measures of average and marginal tax rates (MTR) to capture tax attributes utilizing firm-level tax and financial data.

●      Tax effects in term structure estimation, Jordan, J. V. (1984). The Journal of Finance39(2), 393-406. This study is a refinement and an extension of an earlier study by McCulloch of tax effects in the regression equation for term structure estimation. This study includes tests for tax effects and heteroskedasticity, a reconsideration of the need for an instrumental variable, and a search for the capital gains tax rate in addition to the ordinary income tax rate.

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