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Patent Royalites; Estimated Taxes

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Adrian
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Patent Royalites; Estimated Taxes  Reply with quote  

Hi all,
I have a couple of tax-related questions. I received royalties from a patent this year which were reported to the IRS on a 1099-MISC form. It looks to me as though this gets included on 1040 schedule E and is simply taxed as part of my income. Is there anyone out there that has experience with this and knows whether this is correct? I thought I had read somewhere that patent royalties were taxed at a different rate (as sort of an incentive to invent useful stuff), but I can't find any information of that kind now.

Also, I've been on a fellowship from which income tax cannot be witheld, so I've been paying estimated taxes quarterly so as not to incurr a pentalty for owing the gov't more than $1k when I do taxes. This patent payment came as a complete (albeit very pleasant) surprise, and completely screws up my estimated taxes (it makes my income for the year about 150% of what I estimated it to be). If I recall correctly, there is some provision for such a situation... the gist of it being that you're not held responsible for estimating/prepaying taxes if your financial situation changes during that year. Does anyone know the details on this?

Thanks in advance for any help you're able to offer.

-Adrian
Post Mon Jan 09, 2006 4:23 pm
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coaster
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You can avoid underpayment penalties if you have paid the lesser of 90% of your tax year 2005 tax , or 100% of your 2004 tax. You still have your Jan 17 estimated tax payment coming up next week -- so as long as it's paid by then, it's cool. (That's 90/100% of the actual tax, not the estimate.)

The new TurboTax and TaxCut programs are out. That will make it easy to figure what's due Jan 17.

As far as the royalty payments, I believe you're correct on how it's reported. I tried it out in TurboTax. I don't know what the tax rate is, though. That's figured automatically.

~Tim~
Post Tue Jan 10, 2006 1:16 am
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coaster
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PS - just wanted to add it's probably not a real good idea to act solely on free tax advice given online by non-professionals. It's your money. Check to make sure first. Wink

~Tim~
Post Tue Jan 10, 2006 1:55 pm
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Adrian
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quote:
Originally posted by coaster
PS - just wanted to add it's probably not a real good idea to act solely on free tax advice given online by non-professionals. It's your money. Check to make sure first. Wink


I couldn't agree more... just hoping someone might point me in the right direction.

I'm not so sure about the upcoming estimated tax deadline. If I recall correctly, they frown upon uneven estimated payments- that is, they want four equal payments, not one large payment at the end of the tax year.

Also, I won't have paid 90% of my 2004 tax since my 2004 salary was significantly higher than my 2005 salary. I knew this would be the case, and it was reflected in my estimated tax payments.

Anyway, I'll probably spend some time at the library researching this and then post the details of whatever I decided to do.

-Adrian
Post Tue Jan 10, 2006 3:45 pm
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coaster
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quote:
Originally posted by Adrian
they frown upon uneven estimated payments- that is, they want four equal payments, not one large payment at the end of the tax year.

I've never had a problem with it. But if audited, I can also demonstrate that my estimates vary wildly throughout the year, depending on my net capital gains and dividend income. I know my state income tax is considerably more picky about this than the federal. I've had problems balancing the state payments from time to time. But the federal -- I think if you've made good-faith payments April, June and September, then had unexpected income, they are just happy to get the extra tax in the last payment in January....as long as the sum of all payments conforms with the 90%/100% rule.

~Tim~
Post Tue Jan 10, 2006 5:37 pm
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Adrian
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That's good to hear.
Post Tue Jan 10, 2006 5:52 pm
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