Understanding Individual U.S. Estimated Income Tax Payments and The Safe Harbor Rule for Bermuda Residents

Read Time: 4 min.

Many taxpayers based in Bermuda are unaware when they need to pay estimated taxes, and how to calculate them. We'll cover these topics, and more, in under five minutes.

Estimated tax payments are required for U.S. citizens, regardless of where they live. In certain cases, non-US persons who need to file tax Form 1040NR, may also need to make estimated tax payments. Within the U.S., employers are required by law to withhold U.S. tax from wages, when you live and work abroad your foreign employer will most likely not withhold U.S. tax from your foreign wages.

Instead, depending on your specific circumstances, you may need to make estimated tax payments on a quarterly basis. If your tax liability is smaller that the total amount of estimated tax payments you have made during the year, the difference will be refunded. Alternatively, you can choose to have the overpaid amount applied to your estimated tax for the following tax year.

These payments are necessary when the amount of income tax withheld from your employment income, pension income and portfolio income, (such as dividends, capital gains and interest), is not sufficient and the federal tax expected to be owed is $1,000 or more for the year, after factoring in any tax withheld at source that was remitted to the Internal Revenue Service. It should also be noted that generally, estimated tax payments are not required for a U.S. citizen who had no tax liability in the previous calendar year.

Note: A common misunderstanding of dual nationals of the United States-Bermuda dual nationals is that employment income earned outside the United States is "exempt" from income tax. Similarly, some believe that income from rental properties and Bermuda retirement plans, (among other types of so-called "unearned income"), is not taxable. Generally, income from compensation earned outside the United States may be eligible for an exclusion, but this is only available through a correctly prepared and timely filed tax return; And income from all other sources is not eligible for the same exclusion that is potentially available on compensation.

There are two ways to calculate estimated tax payments: current year method and safe harbor method.

Calculating Estimated Tax Payments - Current Year Tax Method

For an individual to calculate their estimated tax payments, they must estimate their expected taxable income, taking deductions and credits into account, in order to determine the estimated tax for the year. Taxpayers must generally pay at least 90% of their current year taxes throughout the year through withholding at source, estimated tax payments, or a combination of both. If they do not, they may owe an estimated tax underpayment penalty.

Underpayment Penalty

When taxes paid in for the year to the Internal Revenue Service do not equal at least 90 percent of the current year tax, or 100 percent of the prior year's tax liability (110 percent for high income taxpayers), an underpayment penalty is assessed.

Calculating Estimated Tax Payments - Safe Harbor Method

Another way taxpayers can avoid penalties is by pre-paying a "safe harbor" amount equal to 100% of the previous year's tax. For high-income taxpayers, the safe harbor amount is 110% of the previous year's tax. For estimated tax purposes, taxpayers are a high-income taxpayer if their adjusted gross income was $150,000 or more and their filing status is married, filing joint ($75,000 or more if married and filing separately).

Making Estimated Tax Payments

The Internal Revenue Service requires a taxpayer to pay at least 90% of their current year income tax liability, or the prior year “safe harbor” 100% or 110% amount, whichever is smaller. The year is divided into four payment periods for estimated tax purposes, with due dates on April 15, June 15, September 15, and January 15 (of the following year). Missing a due date or paying less than the minimum required amount for a period may result in an underpayment penalty, even if the underpayment is made up later or if a refund is due when filing the income tax return.

Estimated tax payments can be made online, over the phone, or through mail. The payments can be made quarterly or more frequently (weekly, bi-weekly, monthly) as long as the total amount paid by the end of the quarter meets the required threshold.

The above is a short summary outlining estimated tax payments and why they are necessary. Estimated tax payments are important because they can help lower the tax liability for a taxpayer when it comes time to file their income taxes, as well as avoid unnecessary penalties. This is one of many areas in which tax planning is highly beneficial.

Need some help calculating your estimated tax bill? Patterson Partners is here for you. We work with American expats and cross-border families to help them maximize their life+wealth and avoid costly mistakes, particularly when it comes to minimizing your lifetime tax bill. We understand the complex interaction of US and Bermuda tax and regulatory regimes and take account currency, diversification and other portfolio considerations as we help build and implement custom strategies to meet your specific needs. Learn more about our process for becoming a client here. Not ready for help? Check out our founder’s book, Financial Planning for Global Living.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.