Revenue Administrative Bulletin 1988-49

Approved: September 26, 1988

DETERMINATION OF AN UNDERPAYMENT OF ESTIMATED INCOME TAX

RAB-88-49. This Bulletin describes the requirements of an individual, estate or trust to pay estimated income tax, the determination of the amount of an estimated tax installment, the order that estimated income tax is credited, and the period of an underpayment of estimated tax.

Requirement to Pay Estimated Tax

Michigan's Income Tax Act, MCL 206.301(1), provides that

Every person on a calendar year basis, if the person's annual tax can reasonably be expected to exceed the amount withheld under section 351 and the credits allowed under this act by more than $500.00, shall pay to the department installments of estimated tax under this act on or before April 15, June 15, and September 15 of the person's tax year and January 15 in the following year.

A person, for purposes of the requirement to pay estimated tax, includes any individual, estate or trust.

Each installment referred to above shall equal 1/4 of the taxpayer's estimated annual tax after first deducting the approximate amount of tax that will be withheld on compensation. Pursuant to MCL 206.301(5), a person may elect to pay all of the estimated annual tax for the succeeding tax year. If this election is made, payment shall be made at the same time the person files the annual return for the previous full tax year.

A farmer or a fisherman who elects to pay his Federal income tax under an alternative schedule, as provided in Section 6654 of the Internal Revenue Code (IRC), may pay the tax imposed under the Michigan Income Tax Act in the same manner.

In 1988, the Michigan Income Tax Act was amended to allow a seafarer to pay installments of estimated tax in the same manner as provided to a farmer and fisherman. This new provision is codified at MCL 206.301(6) of the Michigan Income Tax Act.

Amount of Required Installment

Michigan's Income Tax Act, MCL 206.301(8), provides that the amount of an installment of estimated tax shall be computed in the same manner as provided in the Internal Revenue Code. Under Sections 6654(d)(1)(B) and (d)(2) of the IRC, a required annual payment of estimated tax means the lessor of:

1. 90 percent of the tax shown on the return for the current taxable year, or

2. 100 percent of the tax shown on the return for the preceding taxable year, or

3. 90 percent of the tax figured on the return for the current taxable year by annualizing the taxable income.

With respect to item 2 above as applied to Michigan Income Tax, a person may use 100 percent of the prior year liability if the preceding tax year was a calendar or fiscal year of 12 months, unless the person had a short taxable year that resulted from a change in the annual accounting period, and the short taxable year was preceded by a taxable year of 12 months. In this case, the person must annualize his or her prior year liability based on Federal Treasury Regulation 1.6654-3.

To annualize the prior year's tax liability based on a short period return, the tax shown on the prior short year tax return is increased by dividing the tax shown on the short period return by the number of months in the short year and multiplying by 12. This figure is used in place of the actual tax due on the short period return. If 100 percent of the annualized tax due is less than 90 percent of the tax shown on the return for the current year, this lesser figure will be used to determine the underpayment of estimated tax.

A person who was not required to file a Michigan income tax return for the preceding taxable year is not required to file and pay estimates in the subsequent year. A person who filed the prior year return as a part-year resident or nonresident may use 100 percent of the Michigan income tax due in the prior taxable year to determine the required annual payment of estimated tax in the current year. The tax liability due in the preceding taxable year is not annualized, providing the tax year was not a short period return for Federal income tax purposes.

Order of Crediting Payments of Estimated Tax and Other Payments

A payment of estimated tax will be applied to the earliest unpaid required installment that an estimated tax is required to be paid.

The amount of tax withheld from wages will generally be distributed evenly over the due dates of the installment periods, unless the taxpayer can establish the actual dates that the income tax was withheld.

A payment made with an extension request for more time to file the annual return will be treated as a payment of the annual tax.

An amount credited forward from the prior year will be considered a payment of estimated tax for the first installment period that an estimated tax payment is due.

When an installment period is overpaid, the overpayment will first be applied to the earliest prior period where there is an underpayment of estimated income tax. Any remaining overpayment will be applied to subsequent installments.

Period of Underpayment

The period of underpayment begins with the date that an installment of estimated tax is due and extends to the date the tax is paid or to the original due date of the annual return, whichever is earlier.

Special Situations

Filing Status Changes. A taxpayer who changes filing status to married filing separately in the current taxable year from a status of married filing jointly in the preceding taxable year may use 100 percent of the tax shown in the prior year or 100 percent of the tax that would have been shown had each spouse filed a separate return for the preceding taxable year.

If separate returns were filed in a prior taxable year and a joint return is filed in the subsequent taxable year, the taxpayers may use 100 percent of the combined tax shown on the prior year returns.

Underpayment Based on Original Tax Determined Due. If a taxpayer files an amended return after filing the original return and before the due date for filing the original return (including extensions), the amount of an underpayment of estimated tax shall be based on the amount of tax determined due on the amended return.

If the original return is filed later than the due date of the return, including extensions, the underpayment of estimated tax shall be based on the tax determined due on the amended return. If an original return is filed timely (including extensions) and the amended return is filed after such date, the underpayment of estimated tax is based on the tax determined due on the original return.