Paying estimated 2021 taxes to avoid paying penalties

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sabhen
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Paying estimated 2021 taxes to avoid paying penalties

Post by sabhen »

My initial payment for 2021 estimated taxes was off. Income is expected to be lower. I was wondering what to do for the remaining payments. Paying less than previous estimate or even skipping some payment or sticking to the same higher amount as the first. I don't want to pay more than I need to even if I get it back as a refund.
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JonnyDVM
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by JonnyDVM »

I think paying less for each of the remaining payments is the better way to do it. Skipping a quarter entirely could possibly lead to a penalty.
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AlohaJoe
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by AlohaJoe »

sabhen wrote: Mon Jun 14, 2021 9:57 pm or sticking to the same higher amount as the first.
Why would you do this?

Calculate your estimated taxes. Pay that amount. Do you owe more than you already paid in Q1? Then send that amount.
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cchrissyy
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by cchrissyy »

The IRS doesn't mind at all that you paid sooner than you needed to. You aren't obligated to keep that up.
If you have enough clarity now regarding what you want to pay for q1 and Q2 combined, simply subtract the q1 payment from that total and the remainder is what you should send for Q2.
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billthecat
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by billthecat »

cchrissyy wrote: Tue Jun 15, 2021 12:02 am The IRS doesn't mind at all that you paid sooner than you needed to. You aren't obligated to keep that up.
If you have enough clarity now regarding what you want to pay for q1 and Q2 combined, simply subtract the q1 payment from that total and the remainder is what you should send for Q2.
Is there any downside to making unequal payments, each one based on actual income during the relevant period?
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cchrissyy
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by cchrissyy »

No, your payments can be unequal if your income is unequal and you fill out the optional form that shows it on your annual tax return but also, even better than that, your payments can be unequal if you front load them and that requires no explanation at all.

So in the OPs case all they need to do is send less next time and as far as the IRS cares they have succeeded in sending "at least" the amount due by "at least" the deadline. Some people send a whole years worth in Q1 just to get it over with and do nothing after that. It's fine
FactualFran
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by FactualFran »

billthecat wrote: Tue Jun 15, 2021 12:17 am Is there any downside to making unequal payments, each one based on actual income during the relevant period?
A possible downside of making payments based on actual income during the relevant period is needing to file the income tax return with Form 2210 and its Schedule AI completed. Completing schedule AI can be time consuming.
RubyTuesday
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by RubyTuesday »

billthecat wrote: Tue Jun 15, 2021 12:17 am
cchrissyy wrote: Tue Jun 15, 2021 12:02 am The IRS doesn't mind at all that you paid sooner than you needed to. You aren't obligated to keep that up.
If you have enough clarity now regarding what you want to pay for q1 and Q2 combined, simply subtract the q1 payment from that total and the remainder is what you should send for Q2.
Is there any downside to making unequal payments, each one based on actual income during the relevant period?
I believe if you don’t meet a safe harbor and have used unequal payments of estimated taxes you’ll be required to complete schedule AI for annualized income. I haven’t completed this schedule but understand it can be a PITA.
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jebmke
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by jebmke »

I normally continue paying the quarterlies at the same rate and then assess the situation in December when all my income is known. Then I adjust the Q4 payment which isn't paid until mid-January. In extreme cases I skip the entire 4th quarter. In my case it would be highly unusual for me to under run so much that I would even need to pull back on Q3.
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lstone19
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by lstone19 »

RubyTuesday wrote: Tue Jun 15, 2021 1:38 pm I believe if you don’t meet a safe harbor and have used unequal payments of estimated taxes you’ll be required to complete schedule AI for annualized income. I haven’t completed this schedule but understand it can be a PITA.
Whether or not you make equal payments, if you don't meet a safe harbor, you MAY file schedule AI but if you don't want to, you are welcome to use the default assumption of income equal through the year (which may be better than AI if your income was front-loaded). You are never required to file Schedule AI.

Also, before you get to using Schedule AI, there is another 2210 exception which is far easier and is actual dates of withholding. If your withholding was front-loaded, doing that may get you into a no penalty situation in which case there is no need to go further.

Your 2210 flowchart should be:
Start with the default, if no penalty, stop.
If penalty, try actual dates of withholding. If no penalty, stop but file 2210 showing actual withholding by date.
If still a penalty, try Schedule AI. If penalty increases, delete/shred Schedule AI and file without Schedule AI and use default of income equal over the year.
If Schedule AI decreased penalty, file 2210 with Schedule AI.
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billthecat
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by billthecat »

lstone19 wrote: Tue Jun 15, 2021 2:37 pm
RubyTuesday wrote: Tue Jun 15, 2021 1:38 pm I believe if you don’t meet a safe harbor and have used unequal payments of estimated taxes you’ll be required to complete schedule AI for annualized income. I haven’t completed this schedule but understand it can be a PITA.
Whether or not you make equal payments, if you don't meet a safe harbor, you MAY file schedule AI but if you don't want to, you are welcome to use the default assumption of income equal through the year (which may be better than AI if your income was front-loaded). You are never required to file Schedule AI.

Also, before you get to using Schedule AI, there is another 2210 exception which is far easier and is actual dates of withholding. If your withholding was front-loaded, doing that may get you into a no penalty situation in which case there is no need to go further.

Your 2210 flowchart should be:
Start with the default, if no penalty, stop.
If penalty, try actual dates of withholding. If no penalty, stop but file 2210 showing actual withholding by date.
If still a penalty, try Schedule AI. If penalty increases, delete/shred Schedule AI and file without Schedule AI and use default of income equal over the year.
If Schedule AI decreased penalty, file 2210 with Schedule AI.
That's insane. I mean, seriously, our tax code is absolutely insane. Forcing retirees to pay 100% of last year (which could be way more than they need) or risk underestimating 90% of this year just so they don't get tripped up by all this complexity is cruel.
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RCL
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by RCL »

I have gone through the 2210/AI experience, and have since then, put together an income and tax payment spreadsheet.
Makes doing the 2210/AI schedules very easy. As such, I am no longer intimidated by the 2210/AI process

Vertically I enter all income sources .. I'm retired, so I only need about 14 income entries
Horizontally I have a column for each of the three months in the quarter, the quarter amounts, any Federal tax paid in the quarter, any state tax paid in the quarter. (28 total columns)

I do this for each quarter and then sum all the quarters for the yearly numbers.
Makes getting the required amounts needed to fill out the forms easy
RubyTuesday
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by RubyTuesday »

lstone19 wrote: Tue Jun 15, 2021 2:37 pm
RubyTuesday wrote: Tue Jun 15, 2021 1:38 pm I believe if you don’t meet a safe harbor and have used unequal payments of estimated taxes you’ll be required to complete schedule AI for annualized income. I haven’t completed this schedule but understand it can be a PITA.
Whether or not you make equal payments, if you don't meet a safe harbor, you MAY file schedule AI but if you don't want to, you are welcome to use the default assumption of income equal through the year (which may be better than AI if your income was front-loaded). You are never required to file Schedule AI.

Also, before you get to using Schedule AI, there is another 2210 exception which is far easier and is actual dates of withholding. If your withholding was front-loaded, doing that may get you into a no penalty situation in which case there is no need to go further.

Your 2210 flowchart should be:
Start with the default, if no penalty, stop.
If penalty, try actual dates of withholding. If no penalty, stop but file 2210 showing actual withholding by date.
If still a penalty, try Schedule AI. If penalty increases, delete/shred Schedule AI and file without Schedule AI and use default of income equal over the year.
If Schedule AI decreased penalty, file 2210 with Schedule AI.
I was thinking of the “short method” versus the “regular method” of figuring your penalty. The short method can be used if you made either no or four equal estimated tax payments on their due dates.
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lstone19
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by lstone19 »

RubyTuesday wrote: Tue Jun 15, 2021 5:06 pm
lstone19 wrote: Tue Jun 15, 2021 2:37 pm
RubyTuesday wrote: Tue Jun 15, 2021 1:38 pm I believe if you don’t meet a safe harbor and have used unequal payments of estimated taxes you’ll be required to complete schedule AI for annualized income. I haven’t completed this schedule but understand it can be a PITA.
Whether or not you make equal payments, if you don't meet a safe harbor, you MAY file schedule AI but if you don't want to, you are welcome to use the default assumption of income equal through the year (which may be better than AI if your income was front-loaded). You are never required to file Schedule AI.

Also, before you get to using Schedule AI, there is another 2210 exception which is far easier and is actual dates of withholding. If your withholding was front-loaded, doing that may get you into a no penalty situation in which case there is no need to go further.

Your 2210 flowchart should be:
Start with the default, if no penalty, stop.
If penalty, try actual dates of withholding. If no penalty, stop but file 2210 showing actual withholding by date.
If still a penalty, try Schedule AI. If penalty increases, delete/shred Schedule AI and file without Schedule AI and use default of income equal over the year.
If Schedule AI decreased penalty, file 2210 with Schedule AI.
I was thinking of the “short method” versus the “regular method” of figuring your penalty. The short method can be used if you made either no or four equal estimated tax payments on their due dates.
Correct. If you make equal payments, the short method and regular method yield the same result. The short method just removes part of the regular method that are not needed if you make equal payments.

If you use tax software (I use TT), it will do 2210 for you automatically and let you know if you owe no penalty with the defaults in which case you need not concern yourself with it any further. Keep in mind that if you owe no penalty with the defaults, you do not file 2210 to prove it. The IRS has the same data and will do their own 2210 for you as part of the processing.
MishkaWorries
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by MishkaWorries »

billthecat wrote: Tue Jun 15, 2021 4:14 pm
lstone19 wrote: Tue Jun 15, 2021 2:37 pm
RubyTuesday wrote: Tue Jun 15, 2021 1:38 pm I believe if you don’t meet a safe harbor and have used unequal payments of estimated taxes you’ll be required to complete schedule AI for annualized income. I haven’t completed this schedule but understand it can be a PITA.
Whether or not you make equal payments, if you don't meet a safe harbor, you MAY file schedule AI but if you don't want to, you are welcome to use the default assumption of income equal through the year (which may be better than AI if your income was front-loaded). You are never required to file Schedule AI.

Also, before you get to using Schedule AI, there is another 2210 exception which is far easier and is actual dates of withholding. If your withholding was front-loaded, doing that may get you into a no penalty situation in which case there is no need to go further.

Your 2210 flowchart should be:
Start with the default, if no penalty, stop.
If penalty, try actual dates of withholding. If no penalty, stop but file 2210 showing actual withholding by date.
If still a penalty, try Schedule AI. If penalty increases, delete/shred Schedule AI and file without Schedule AI and use default of income equal over the year.
If Schedule AI decreased penalty, file 2210 with Schedule AI.
That's insane. I mean, seriously, our tax code is absolutely insane. Forcing retirees to pay 100% of last year (which could be way more than they need) or risk underestimating 90% of this year just so they don't get tripped up by all this complexity is cruel.
And then add in the RMD rules and cruel is the exact right word.
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lakpr
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by lakpr »

An idea - you could stick to the current estimated payments schedule, and request the refunds in the form of I bonds next year. A good way to buy I bonds more than the $10k per SSN limit.

I did read that you did not want a refund, but consider this an opportunity to buy $5k more of I bonds, which at 3.54% yield currently are a screaming good deal. Inflation over the past two months had been more than 4% (edit: annualized rate), so it is conceivable that the reset in November will be higher. There is no fixed income instrument available in the market that comes remotely close to this yield
Last edited by lakpr on Wed Jun 16, 2021 9:29 am, edited 1 time in total.
Shallowpockets
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by Shallowpockets »

MishkaWorries wrote: Tue Jun 15, 2021 5:28 pm
billthecat wrote: Tue Jun 15, 2021 4:14 pm
lstone19 wrote: Tue Jun 15, 2021 2:37 pm
RubyTuesday wrote: Tue Jun 15, 2021 1:38 pm I believe if you don’t meet a safe harbor and have used unequal payments of estimated taxes you’ll be required to complete schedule AI for annualized income. I haven’t completed this schedule but understand it can be a PITA.
Whether or not you make equal payments, if you don't meet a safe harbor, you MAY file schedule AI but if you don't want to, you are welcome to use the default assumption of income equal through the year (which may be better than AI if your income was front-loaded). You are never required to file Schedule AI.

Also, before you get to using Schedule AI, there is another 2210 exception which is far easier and is actual dates of withholding. If your withholding was front-loaded, doing that may get you into a no penalty situation in which case there is no need to go further.

Your 2210 flowchart should be:
Start with the default, if no penalty, stop.
If penalty, try actual dates of withholding. If no penalty, stop but file 2210 showing actual withholding by date.
If still a penalty, try Schedule AI. If penalty increases, delete/shred Schedule AI and file without Schedule AI and use default of income equal over the year.
If Schedule AI decreased penalty, file 2210 with Schedule AI.

That's insane. I mean, seriously, our tax code is absolutely insane. Forcing retirees to pay 100% of last year (which could be way more than they need) or risk underestimating 90% of this year just so they don't get tripped up by all this complexity is cruel.
And then add in the RMD rules and cruel is the exact right word.
Yeah, that's rough on the Bogleheads who are mostly in the top tier of income, earned or not, and have plenty of disposable income.
So cruel.
FactualFran
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by FactualFran »

billthecat wrote: Tue Jun 15, 2021 4:14 pm That's insane. I mean, seriously, our tax code is absolutely insane. Forcing retirees to pay 100% of last year (which could be way more than they need) or risk underestimating 90% of this year just so they don't get tripped up by all this complexity is cruel.
Nobody is forced to pay 100% of the income tax for last year. That is one of the conditions for which underpayment penalties are not charged. A reason for which underpayment penalties are waived is that one retired during the current or previous year after reaching age 62 and did not willfully neglect making payments.
jebmke
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by jebmke »

FactualFran wrote: Wed Jun 16, 2021 1:42 pm
billthecat wrote: Tue Jun 15, 2021 4:14 pm That's insane. I mean, seriously, our tax code is absolutely insane. Forcing retirees to pay 100% of last year (which could be way more than they need) or risk underestimating 90% of this year just so they don't get tripped up by all this complexity is cruel.
Nobody is forced to pay 100% of the income tax for last year. That is one of the conditions for which underpayment penalties are not charged. A reason for which underpayment penalties are waived is that one retired during the current or previous year after reaching age 62 and did not willfully neglect making payments.
Also, as a practical matter the times I've come up short it hasn't been by much and the penalty was quite small. Certainly not worth setting my hair on fire over.

I've done hundreds of returns in the last decade and a lot of taxpayers mistakenly think that paying even a small interest and penalty somehow gives you a black mark with the IRS and is somehow "very bad."
When you discover that you are riding a dead horse, the best strategy is to dismount.
Thesaints
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by Thesaints »

billthecat wrote: Tue Jun 15, 2021 4:14 pm That's insane. I mean, seriously, our tax code is absolutely insane. Forcing retirees to pay 100% of last year (which could be way more than they need) or risk underestimating 90% of this year just so they don't get tripped up by all this complexity is cruel.
It is a lot worse for working people. Retirees income doesn't change that much year after year. A working person's salary might undergo large uscillations, which make following the safe harbor method impractical.
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cchrissyy
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Re: Paying estimated 2021 taxes to avoid paying penalties

Post by cchrissyy »

jebmke wrote: Wed Jun 16, 2021 3:30 pm
Also, as a practical matter the times I've come up short it hasn't been by much and the penalty was quite small. Certainly not worth setting my hair on fire over.

I've done hundreds of returns in the last decade and a lot of taxpayers mistakenly think that paying even a small interest and penalty somehow gives you a black mark with the IRS and is somehow "very bad."
for sure

one year, my income did not come evenly but was weighted more to the end of the year, which meant my payments in the first two quarters were too low. i could have filled out a form to show the irs what quarters the income actually came from and the penalty would have gone away. I decided not to even bother doing that form because the difference was $6.
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