Our adjusted gross income in 2006 was around $35,000, and this year would have been the same, except for two new things:

1) I received about $17,000 in academic grants/fellowships that were not pre-taxed

2) I started a small internet business in May 2007 and profited approximately $4,000. Total revenue was around $35,000 and expenses (the items I sold) cost around $31,000

Our W2s will reflect withholdings just on the $35,000 of wages. With approximately $21,000 in additional income, we obviously will have underpaid.

My questions:

- Is it important that we pay an estimated tax for the last quarter by Jan. 15th, and then assume we will be penalized for not paying the ET for the 2nd and 3rd quarters?

- Any guesses as to the range of additional tax we will owe?

- What will happen if we do our taxes as normal (no pre-ET payments) and cut a check for the underpaid amount?

I should add that my internet business is on hold as of Dec. 1st, and the additional income we experience this year is unlikely to repeat next year.

Thanks!

I think the primary concern is to avoid paying penalties and interest on the underpayment of your additional tax liability.

Ok, the IRS has made this fairly easy for taxpayers who are Non-Farmers, so long as they at least 110% of prior year tax liability, then they would not impose penalty on the underpayment of the tax liability.

Of course, you will have to pay the full balance of the tax due by April 15th with the filing of your tax return or with the extension of your tax return.

The other method to avoid penalty is to pay at least 90% of 2007 tax liability.

I would prefer the former method, as it is easily computable.

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