Alimony And Estimated Tax Payments

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, 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). If you are employed, the tax withholding from your paycheck pays into the system for you.

When you file your return, you reconcile the amount that has been withheld and the amount you owe. If the tax that you owe is LESS than the amount that has been withheld, then you get a tax refund. On the other hand, if the tax that you owe is GREATER than the amount that was withheld, then you owe money to the IRS to make up the difference. Since there is no withholding tax from alimony payments, you must manually submit your tax payments to the IRS yourself. Plan your cash flow carefully.

Set aside cash on a monthly basis to pay for your estimated taxes. If you prepare your own tax returns, your computer program should estimate your tax payments for the following year. Otherwise, ask your accountant to project how much you might owe and monitor your income from all sources to make sure you are paying enough. To minimize your estimated tax payments, you can increase your withholding on income you receive from your job.

Electronic Federal Tax Payment System: payments will be directly withdrawn from either a checking or savings account. Electronic Funds Withdrawal: when you file your 2010 return, four payments can be scheduled to withdraw automatically from either a checking or savings account. Your payment schedule will be acknowledged once the IRS receives your return.

Credit or Debit Card: the IRS enlists the help of three different service providers. A convenience fee may be charged. To ensure that you get credit for payments made, remember to tell your accountant (or if preparing tax returns yourself, indicate on your return) that you have paid estimated tax payments.

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Follow up in writing. Send your letters by certified mail and ask for a return receipt. That creates a record of your communications. File a police report. Also, create an identity theft report with the FTC. When using an identity theft protection service, specialists can help you by making the calls, filing the paperwork and taking other steps to help restore your identity.

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As part of its breach response, Equifax is offering consumers one year of a free service that includes credit file monitoring and others services. Keep in mind that once your personal information is breached, identity thieves may wait a year or more before using or selling it. You may want to consider additional services to help protect your identity beyond that free offer. In the wake of such a large breach, some consumers may decide not to wait for their identities to be stolen before considering a credit freeze to, essentially, lock their credit.

As noted earlier, this type of freeze may involve fees. They may also require some advance planning to "thaw" them if you need to open a new credit account or apply for a mortgage or other type of loan. Keep this in mind if you decide to go this route. Another option is a fraud alert, which tells potential lenders to verify the identity of anyone opening an account in your name. They’re free, but must be reinstated every 90 days in most cases.

Also, note that neither a credit freeze nor a fraud alert will prevent all forms of identity theft—there are plenty of types that do not require a credit check. Also, credit freezes and alerts won’t prevent someone who gains access to your existing accounts from fraudulent activity. Identity theft protection vs.



The bottom line is that if a company offers you free credit monitoring or identity theft protection and restoration services, it probably won’t hurt to take advantage of it. But that alone usually lasts one or two years and actual services may vary. Also, depending on the company you sign up with, you might be seeing credit alerts from only one of the three credit reporting agencies.