Made a mistake of uneven estimated taxes. Do I need CPA?

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Topic Author
nrkv
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Joined: Thu Jan 21, 2021 2:34 pm

Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

Hello, I encountered a lot of short term capital gains in January 2021. After much agony with financial advisor, I moved funds out of under management but then I’m stuck with paying taxes at my 35% tax bracket level. I started payroll withholding as much as I can and also started paying estimated taxes. I continued to look for short term loss opportunities to offset gains.

By September 15 estimated tax time, I realized that I still owe a lot in taxes by April this year and I paid 2,000$ more than what I paid in April or June just so that I can ease out the pain. I read recently that making uneven payments means showing IRS when the money is made.

I normally use TurboTax myself.
1. Is my situation so bad that I need CPA to file my taxes this year?
2. For the January estimated taxes that I need to pay by 15th, should I pay what I paid in April and June, or it doesn’t really matter how much I pay now because the damage is already done in September?

Thanks so much!
diy60
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by diy60 »

nrkv wrote: Sun Jan 09, 2022 10:38 amI read recently that making uneven payments means showing IRS when the money is made.
I believe this is false.
VanGar+Goyle
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by VanGar+Goyle »

nrkv wrote: Sun Jan 09, 2022 10:38 am ... I read recently that making uneven payments means showing IRS when the money is made.

I normally use TurboTax myself.
1. Is my situation so bad that I need CPA to file my taxes this year?
2. For the January estimated taxes that I need to pay by 15th, should I pay what I paid in April and June, or it doesn’t really matter how much I pay now because the damage is already done in September?

Thanks so much!
1. Do you feel comfortable filling out form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, for quarterly estimated taxes? It is only 4 dense pages including a little flow chart. But it will show the IRS even more when the money was made. If not, then you may need a CPA.
2. You should pay enough by Jan 18 to reach a safe harbor, which includes 90% of the 2021's taxes, or 110% of 2020's taxes.
3. You could file and pay completely by January 31, 2022. I would not depend in meeting that deadline.
cadreamer2015
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by cadreamer2015 »

You will probably want to fill out form 2210 Underpayment of Estimated Tax. If memory serves, this form does indeed ask you to allocate your income and tax payments by quarter of the year. TurboTax supports filing form 2210. If you are comfortable using TurboTax to do your taxes I don’t think you need a CPA.
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slacker2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by slacker2022 »

It sounds like you paid the extra taxes through additional withholdings (W-4) rather than through 1040-ES (estimated taxes). In this case, you can check to see if you meet one of the safe harbor conditions. If so, you don't owe any penalties and you should be OK.

You can check IRS site for safe harbor conditions but if you meet one of these conditions, you don't owe penalty. Just file tax regularly on time (4/15) and you'll pay any underpaid tax or get refund for overpayment as usual without any penalty.

Safe Harbor Rules: ( Please check IRS website for definitive rules )
A. if your AGI is less than $150k, you paid at least 100% of previous year's federal tax through withholdings.
B. If your AGI is $150k or more, you paid at least 110% of the previous year's federal tax through withholdings
C. You paid at least 90% of current year's tax through withholdings.
D. You owe less than $1000 in tax after withholdings and credits.

By withholdings, it means you had taxes withheld through payroll or through brokerage at the time of distribution ( basically not through quarterly estimated tax payments ). There are few other ways to get out of paying penalty but they do not apply generally so I won't mention those here. You can look them up on IRS website.

If you don't pass safe harbor conditions, you may owe penalty since IRS want you to make estimated taxes evenly across 4 periods ( not exactly quarters ). If you do owe penalty, because your major tax event happened on 1st tax period of 2021, you will likely be better off having IRS calculate the penalty. If you had uneven income sometimes it's better if you file form 2210 using annualized income installment method to reduce/eliminate penalty. For example, in my case, I had large distribution event in December so I will pay 2021 estimated taxes for 4th period on (1/15/2022) for the distribution. I want to file form 2210 to tell the IRS, most of my income came in 4th period of 2021 so IRS doesn't try to assess penalty(basically interest) thinking I made the income through out the year.
Last edited by slacker2022 on Sun Jan 09, 2022 11:09 am, edited 1 time in total.
GreendaleCC
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by GreendaleCC »

diy60 wrote: Sun Jan 09, 2022 10:43 am
nrkv wrote: I read recently that making uneven payments means showing IRS when the money is made.
I believe this is false.
No, this is true! The “regular” tax return methodology only assumes equally distributed earnings throughout the year, so only treats equally-sized payments of quarterly estimated taxes as “on-time” payments.

If you don’t make equal estimated tax payments, there is an option to files taxes in a way that accounts for earnings and tax payments on a quarter-by-quarter basis so the IRS can understand whether or not they matched during the year. I had to do this one year and used TurboTax to do it. You want the “annualized income installment method.”
Topic Author
nrkv
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

slacker2022 wrote: Sun Jan 09, 2022 11:06 am It sounds like you paid the extra taxes through additional withholdings (W-4) rather than through 1040-ES (estimated taxes). In this case, you can check to see if you meet one of the safe harbor conditions. If so, you don't owe any penalties and you should be OK.

You can check IRS site for safe harbor conditions but if you meet one of these conditions, you don't owe penalty. Just file tax regularly on time (4/15) and you'll pay additional tax or get refund as usual without any penalty.

Safe Harbor Rules: ( Please check IRS website for definitive rules )
A. if your AGI is less than $150k, you paid at least 100% of previous year's federal tax through withholdings.
B. If your AGI is $150k or more, you paid at least 110% of the previous year's federal tax through withholdings
C. You paid at least 90% of current year's tax through withholdings.
D. You owe less than $1000 in tax after withholdings and credits.

By withholdings, it means you had taxes withheld through payroll or through brokerage at the time of distribution ( basically not through quarterly estimated tax payments ). There are few other ways to get out of paying penalty but they do not apply generally so I won't mention those here. You can look them up on IRS website.

If you don't pass safe harbor conditions, you may owe penalty since IRS want you to make estimated taxes evenly across 4 periods ( not exactly quarters ). If you do owe penalty, because your major tax event happened on 1st tax period of 2021, you will likely be better off having IRS calculate the penalty. If you had uneven income sometimes it's better if you file form 2210 using annualized income installment method to reduce/eliminate penalty. For example, in my case, I had large distribution event in December so I will pay 2021 estimated taxes for 4th period on (1/15/2022) for the distribution. I want to file form 2210 to tell the IRS, most of my income came in 4th period of 2021 so IRS doesn't try to assess penalty(basically interest) thinking I made the income through out the year.
Thank you for details. I withheld from payroll and also paid estimated taxes; 4th installment paying this week.
AGI is more than 150k and I definitely paid more than 110% of 2020 taxes through payroll withholding and estimated taxes.
1. I just reviewed form 2210, it seems to make calculations just by counting payroll withholding taxes and not estimated payments (line 6). If that is the case then it’s more than 1000$ that I owe.
2. While looking at schedule AI of form 2210, it asks for income made in different periods of year. Do I add short term gains made in January 2021, as income right there?
quietseas
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by quietseas »

You don't need an accountant, tax software will handle this situation, but you need to review your data entry very closely. You'll need to review the tax forms and worksheets to make sure what you see makes sense and look for adjustments you need to make (incomplete data entry) if you need to do so. it is quite possible you will not be able to rely 100% on interview questions without looking at the forms and worksheets directly.
Topic Author
nrkv
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Joined: Thu Jan 21, 2021 2:34 pm

Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

quietseas wrote: Sun Jan 09, 2022 11:22 am You don't need an accountant, tax software will handle this situation, but you need to review your data entry very closely. You'll need to review the tax forms and worksheets to make sure what you see makes sense and look for adjustments you need to make (incomplete data entry) if you need to do so. it is quite possible you will not be able to rely 100% on interview questions without looking at the forms and worksheets directly.
Will do. Thank you.
Topic Author
nrkv
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

cadreamer2015 wrote: Sun Jan 09, 2022 10:54 am You will probably want to fill out form 2210 Underpayment of Estimated Tax. If memory serves, this form does indeed ask you to allocate your income and tax payments by quarter of the year. TurboTax supports filing form 2210. If you are comfortable using TurboTax to do your taxes I don’t think you need a CPA.
Thank you. I will try using TT myself as soon as I have the forms and will seek out CPA if I’m doubtful.
prd1982
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by prd1982 »

nrkv wrote: Sun Jan 09, 2022 11:19 am
Thank you for details. I withheld from payroll and also paid estimated taxes; 4th installment paying this week.
AGI is more than 150k and I definitely paid more than 110% of 2020 taxes through payroll withholding and estimated taxes.
Sorry, but you missed one detail from slacker2022: the 110% uses your payroll withholding (and credits), but NOT any estimated taxes.

I may be wrong, but I thought you would only owe the penalty on the amount you under paid to get to the 110%. If it were me,I would fill out your taxes without filling out the form to handle uneven payments. Look at the penalty. If only a couple of dollars, just pay it. Or give the form a shot for experience.
pshonore
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by pshonore »

cadreamer2015 wrote: Sun Jan 09, 2022 10:54 am You will probably want to fill out form 2210 Underpayment of Estimated Tax. If memory serves, this form does indeed ask you to allocate your income and tax payments by quarter of the year. TurboTax supports filing form 2210. If you are comfortable using TurboTax to do your taxes I don’t think you need a CPA.
You actually have to fill out Form 2210AI (Annualized Income Installment method). TT will not help you with this other than supplying a blank form. You effectively have to split your income by the four payment periods (not quarters): 1/1 - 3/31, 4/1 - 5/31, 6/1 - 8/31 and 9/1 - 12/31. That can be a tedious task if you don't like working with numbers and have lots of dividends, cap gain/losses, and uneven income, etc.
slacker2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by slacker2022 »

nrkv wrote: Sun Jan 09, 2022 11:19 am
slacker2022 wrote: Sun Jan 09, 2022 11:06 am It sounds like you paid the extra taxes through additional withholdings (W-4) rather than through 1040-ES (estimated taxes). In this case, you can check to see if you meet one of the safe harbor conditions. If so, you don't owe any penalties and you should be OK.

You can check IRS site for safe harbor conditions but if you meet one of these conditions, you don't owe penalty. Just file tax regularly on time (4/15) and you'll pay additional tax or get refund as usual without any penalty.

Safe Harbor Rules: ( Please check IRS website for definitive rules )
A. if your AGI is less than $150k, you paid at least 100% of previous year's federal tax through withholdings.
B. If your AGI is $150k or more, you paid at least 110% of the previous year's federal tax through withholdings
C. You paid at least 90% of current year's tax through withholdings.
D. You owe less than $1000 in tax after withholdings and credits.

By withholdings, it means you had taxes withheld through payroll or through brokerage at the time of distribution ( basically not through quarterly estimated tax payments ). There are few other ways to get out of paying penalty but they do not apply generally so I won't mention those here. You can look them up on IRS website.

If you don't pass safe harbor conditions, you may owe penalty since IRS want you to make estimated taxes evenly across 4 periods ( not exactly quarters ). If you do owe penalty, because your major tax event happened on 1st tax period of 2021, you will likely be better off having IRS calculate the penalty. If you had uneven income sometimes it's better if you file form 2210 using annualized income installment method to reduce/eliminate penalty. For example, in my case, I had large distribution event in December so I will pay 2021 estimated taxes for 4th period on (1/15/2022) for the distribution. I want to file form 2210 to tell the IRS, most of my income came in 4th period of 2021 so IRS doesn't try to assess penalty(basically interest) thinking I made the income through out the year.
Thank you for details. I withheld from payroll and also paid estimated taxes; 4th installment paying this week.
AGI is more than 150k and I definitely paid more than 110% of 2020 taxes through payroll withholding and estimated taxes.
1. I just reviewed form 2210, it seems to make calculations just by counting payroll withholding taxes and not estimated payments (line 6). If that is the case then it’s more than 1000$ that I owe.
2. While looking at schedule AI of form 2210, it asks for income made in different periods of year. Do I add short term gains made in January 2021, as income right there?
1. For safe harbor test, you only look at withholdings through your employer (and possibly brokerage) and don't include any 1040-ES payments. So look at how much you withheld in 2021 through your employer and compare that to your last year's total federal tax for 110% test. So if you paid $10,000 in federal tax last year and you withheld at least $11,000 this year, then you don't owe any penalty. ( Current year's 90% test may be harder to pass if your January distribution was substantial ). You can probably do quick estimation through Turbo Tax. I actually did this in HRBlock software myself ( Unfortunately for me I missed safe harbor test by $50 ). If you do pass safe harbor test, technically, you didn't have to pay quarterly estimated tax and could have just wait to pay all additional taxes from January event at the tax filing time.

2. If you don't pass safe harbor test, because most of the extra tax event for you happened in January of 2021, you will likely be better off letting IRS figure out the penalty. IRS will assume even income and assess less penalty/interest then if you filled out Schedule AI on Form 2210. Pay any underpayment tax when you file tax and I would just let IRS send you a bill for penalty if you any. In my case, because my large income was in December, I would benefit from filing Form 2210 with my tax return and I had to pay estimated tax by 1/15/22 to avoid fractional interest/penalty for the 4th period.
Last edited by slacker2022 on Sun Jan 09, 2022 11:41 am, edited 1 time in total.
Topic Author
nrkv
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Joined: Thu Jan 21, 2021 2:34 pm

Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

prd1982 wrote: Sun Jan 09, 2022 11:28 am
nrkv wrote: Sun Jan 09, 2022 11:19 am
Thank you for details. I withheld from payroll and also paid estimated taxes; 4th installment paying this week.
AGI is more than 150k and I definitely paid more than 110% of 2020 taxes through payroll withholding and estimated taxes.
Sorry, but you missed one detail from slacker2022: the 110% uses your payroll withholding (and credits), but NOT any estimated taxes.

I may be wrong, but I thought you would only owe the penalty on the amount you under paid to get to the 110%. If it were me,I would fill out your taxes without filling out the form to handle uneven payments. Look at the penalty. If only a couple of dollars, just pay it. Or give the form a shot for experience.
Thank you for catching my error. I still may have paid 110% of 2020 taxes through withholding. Let me login to payroll system and check.
Yes, I will try filling TurboTax myself.
Topic Author
nrkv
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Joined: Thu Jan 21, 2021 2:34 pm

Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

slacker2022 wrote: Sun Jan 09, 2022 11:35 am
nrkv wrote: Sun Jan 09, 2022 11:19 am
Thank you for details. I withheld from payroll and also paid estimated taxes; 4th installment paying this week.
AGI is more than 150k and I definitely paid more than 110% of 2020 taxes through payroll withholding and estimated taxes.
1. I just reviewed form 2210, it seems to make calculations just by counting payroll withholding taxes and not estimated payments (line 6). If that is the case then it’s more than 1000$ that I owe.
2. While looking at schedule AI of form 2210, it asks for income made in different periods of year. Do I add short term gains made in January 2021, as income right there?
1. For safe harbor test, you only look at withholdings through your employer (and possibly brokerage) and don't include any 1040-ES payments. So look at how much you withheld in 2021 through your employer and compare that to your last year's total federal tax for 110% test. So if you paid $10,000 in federal tax last year and you withheld at least $11,000 this year, then you don't owe any penalty. ( Current year's 90% test may be harder to pass if your January distribution was substantial ). You can probably do quick estimation through Turbo Tax. I actually did this in HRBlock software myself ( Unfortunately for me I missed safe harbor test by $50 ). If you do pass safe harbor test, technically, you didn't have to pay quarterly estimated tax and could have just wait to pay all additional taxes from January event at the tax filing time.

2. If you don't pass safe harbor test, because most of the extra tax event for you happened in January of 2021, you will likely be better off letting IRS figure out the penalty. IRS will assume even income and assess less penalty/interest then if you filled out Schedule AI on Form 2210. Pay any underpayment tax when you file tax and I would just let IRS send you a bill for penalty if you any. In my case, because my large income was in December, I would benefit from filing Form 2210 with my tax return and I had to pay estimated tax by 1/15/22 to avoid fractional interest/penalty for the 4th period.
I don’t have W2 yet but I checked the year end summary and compared to 2020 federal taxes and it was more than 110%. Sorry that you missed by 50$. I have a lot to learn and hopefully be better with this year’s withholdings. Thank you for your patience!
Gill
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Gill »

If through withholding you paid more than 110% of 2020 tax you have nothing to worry about until you pay the balance with filing your 2021 return. If for some reason you feel you underpaid, the safest and simplest step is to make an estimated payment by 1/18/22 and pay the balance of tax you estimate to be due for 2021.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Katietsu
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Katietsu »

slacker2022 wrote: Sun Jan 09, 2022 11:35 am. I actually did this in HRBlock software myself ( Unfortunately for me I missed safe harbor test by $50 ).
This is not really unfortunate. Without doing the actual calculation, I estimate the underpayment penalty would be rounded to $1. The IRS writes off $1 underpayment penalties thus lowering the real life penalty to $0. No need to do an annualized 2210 at all.
Topic Author
nrkv
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

Gill wrote: Sun Jan 09, 2022 12:07 pm If through withholding you paid more than 110% of 2020 tax you have nothing to worry about until you pay the balance with filing your 2021 return. If for some reason you feel you underpaid, the safest and simplest step is to make an estimated payment by 1/18/22 and pay the balance of tax you estimate to be due for 2021.
Gill
Thank you. This realization and today’s math exercise made me plan for 2022 payroll withholding instead of relying solely on estimated tax payments.
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mrspock
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by mrspock »

Honestly…. as long as you pay up fully and honestly come April, I don’t think anyone cares. Don’t stress over estimated payments, do you best and top it off if necessary in April.

What they will care about is if you try to cheat them come April with accounting gimmicks or scams. Be honest and I think you will be just fine.
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Lee_WSP
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Lee_WSP »

There are two parts to the estimated taxes safe harbor rule.

1) is whether enough was paid to the IRS or not. Already covered.
2) is whether the payments were four equal payments.

If you use withholdings, the payments are treated as made throughout the year or beginning of the year or however you want to interpret the IRS. Point being, there’s no equal payments issue.

If you use quarterly estimated taxes, you need to make 4 equal payments. But the IRS calculates the payments in a specific way such that if you front load the first two payments, the last two can be lower. You can pay it all in the first quarter, half in the first quarter and half in the second quarter, 3/4 in the first quarter and spread out the rest, etc etc. I don’t have the exact language in front of me, but I’m pretty sure you can find it on the instructions sheet for the forms.
Topic Author
nrkv
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

Lee_WSP wrote: Sun Jan 09, 2022 1:29 pm There are two parts to the estimated taxes safe harbor rule.

1) is whether enough was paid to the IRS or not. Already covered.
2) is whether the payments were four equal payments.

If you use withholdings, the payments are treated as made throughout the year or beginning of the year or however you want to interpret the IRS. Point being, there’s no equal payments issue.

If you use quarterly estimated taxes, you need to make 4 equal payments. But the IRS calculates the payments in a specific way such that if you front load the first two payments, the last two can be lower. You can pay it all in the first quarter, half in the first quarter and half in the second quarter, 3/4 in the first quarter and spread out the rest, etc etc. I don’t have the exact language in front of me, but I’m pretty sure you can find it on the instructions sheet for the forms.
Thanks for additional details. I’ll read instructions; estimated taxes are first time for me.
Topic Author
nrkv
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

mrspock wrote: Sun Jan 09, 2022 1:17 pm Honestly…. as long as you pay up fully and honestly come April, I don’t think anyone cares. Don’t stress over estimated payments, do you best and top it off if necessary in April.

What they will care about is if you try to cheat them come April with accounting gimmicks or scams. Be honest and I think you will be just fine.
I understand. I don’t want to get into trouble by being ignorant. Thanks for the response.
Pete3
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Pete3 »

slacker2022 wrote: Sun Jan 09, 2022 11:06 am It sounds like you paid the extra taxes through additional withholdings (W-4) rather than through 1040-ES (estimated taxes). In this case, you can check to see if you meet one of the safe harbor conditions. If so, you don't owe any penalties and you should be OK.

You can check IRS site for safe harbor conditions but if you meet one of these conditions, you don't owe penalty. Just file tax regularly on time (4/15) and you'll pay any underpaid tax or get refund for overpayment as usual without any penalty.

Safe Harbor Rules: ( Please check IRS website for definitive rules )
A. if your AGI is less than $150k, you paid at least 100% of previous year's federal tax through withholdings.
B. If your AGI is $150k or more, you paid at least 110% of the previous year's federal tax through withholdings
C. You paid at least 90% of current year's tax through withholdings.
D. You owe less than $1000 in tax after withholdings and credits.

By withholdings, it means you had taxes withheld through payroll or through brokerage at the time of distribution ( basically not through quarterly estimated tax payments ). There are few other ways to get out of paying penalty but they do not apply generally so I won't mention those here. You can look them up on IRS website.

If you don't pass safe harbor conditions, you may owe penalty since IRS want you to make estimated taxes evenly across 4 periods ( not exactly quarters ). If you do owe penalty, because your major tax event happened on 1st tax period of 2021, you will likely be better off having IRS calculate the penalty. If you had uneven income sometimes it's better if you file form 2210 using annualized income installment method to reduce/eliminate penalty. For example, in my case, I had large distribution event in December so I will pay 2021 estimated taxes for 4th period on (1/15/2022) for the distribution. I want to file form 2210 to tell the IRS, most of my income came in 4th period of 2021 so IRS doesn't try to assess penalty(basically interest) thinking I made the income through out the year.
As a 1099 contractor what you wrote above is startling to me. Not sure if this is specific to OP but I always assumed that safe harbor provisions applied to me (and my 4 "quarterly" estimated tax payments) but looking at A-D above you seem to be saying that only withholdings (and credits) apply.

In looking at IRS topic # 306, it seems to me that they are saying that both withholding AND estimated tax payments apply to C and D above.

I am reading it wrong or did you tailor your reply to the specific case outlined in the original post
prd1982
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by prd1982 »

Pete3 wrote: Sun Jan 09, 2022 2:50 pm
As a 1099 contractor what you wrote above is startling to me. Not sure if this is specific to OP but I always assumed that safe harbor provisions applied to me (and my 4 "quarterly" estimated tax payments) but looking at A-D above you seem to be saying that only withholdings (and credits) apply.

In looking at IRS topic # 306, it seems to me that they are saying that both withholding AND estimated tax payments apply to C and D above.

I am reading it wrong?
The OP stated that he was making a 4th quarter estimated payment. If you make 4 equal quarterly payments, they count. I also think it counts if you make a single 1st quarter payment. This thread was only addressing the OP’s question
SuzBanyan
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by SuzBanyan »

prd1982 wrote: Sun Jan 09, 2022 2:54 pm
Pete3 wrote: Sun Jan 09, 2022 2:50 pm
As a 1099 contractor what you wrote above is startling to me. Not sure if this is specific to OP but I always assumed that safe harbor provisions applied to me (and my 4 "quarterly" estimated tax payments) but looking at A-D above you seem to be saying that only withholdings (and credits) apply.

In looking at IRS topic # 306, it seems to me that they are saying that both withholding AND estimated tax payments apply to C and D above.

I am reading it wrong?
The OP stated that he was making a 4th quarter estimated payment. If you make 4 equal quarterly payments, they count. I also think it counts if you make a single 1st quarter payment. This thread was only addressing the OP’s question
I think people are getting too hung up on the need for 4 equal quarterly estimated payments. Taxes are due on a pay-as you-go basis. Unless the IRS is told otherwise, it assumes your income was earned evenly throughout the year.

So for most people making only estimated payments (no withholding), the safest approach is 4 equal quarterly payments.

But there is little reason to panic if this doesn’t happen. I under-estimated my taxes for 2021, think my income would be declining from 2020 in part due to not doing a Roth conversion. Before my 2nd estimated payment was due, it became apparent that my income would be higher and I needed to meet the safe harbor. So my 2nd payment made up the amount that should have been included in the 1st payment, as well as all of the 2nd payment. The remainder of the quarterly payments were equal to or greater than 1/4 of my safe harbor. My initial calculations show that the late portion of the 1st payment will result in interest being due of about $6. It might be lower if I completed form 2210, but I’m not sure the additional accounting needed is worth saving up to $6.
slacker2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by slacker2022 »

Katietsu wrote: Sun Jan 09, 2022 12:45 pm
slacker2022 wrote: Sun Jan 09, 2022 11:35 am. I actually did this in HRBlock software myself ( Unfortunately for me I missed safe harbor test by $50 ).
This is not really unfortunate. Without doing the actual calculation, I estimate the underpayment penalty would be rounded to $1. The IRS writes off $1 underpayment penalties thus lowering the real life penalty to $0. No need to do an annualized 2210 at all.
That's true. I only meant that now I have to figure out how to fill out Form 2210 which I haven't done before. It's probably going to be a good thing to learn how to fill it out in the long run.
slacker2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by slacker2022 »

Pete3 wrote: Sun Jan 09, 2022 2:50 pm
slacker2022 wrote: Sun Jan 09, 2022 11:06 am It sounds like you paid the extra taxes through additional withholdings (W-4) rather than through 1040-ES (estimated taxes). In this case, you can check to see if you meet one of the safe harbor conditions. If so, you don't owe any penalties and you should be OK.

You can check IRS site for safe harbor conditions but if you meet one of these conditions, you don't owe penalty. Just file tax regularly on time (4/15) and you'll pay any underpaid tax or get refund for overpayment as usual without any penalty.

Safe Harbor Rules: ( Please check IRS website for definitive rules )
A. if your AGI is less than $150k, you paid at least 100% of previous year's federal tax through withholdings.
B. If your AGI is $150k or more, you paid at least 110% of the previous year's federal tax through withholdings
C. You paid at least 90% of current year's tax through withholdings.
D. You owe less than $1000 in tax after withholdings and credits.

By withholdings, it means you had taxes withheld through payroll or through brokerage at the time of distribution ( basically not through quarterly estimated tax payments ). There are few other ways to get out of paying penalty but they do not apply generally so I won't mention those here. You can look them up on IRS website.

If you don't pass safe harbor conditions, you may owe penalty since IRS want you to make estimated taxes evenly across 4 periods ( not exactly quarters ). If you do owe penalty, because your major tax event happened on 1st tax period of 2021, you will likely be better off having IRS calculate the penalty. If you had uneven income sometimes it's better if you file form 2210 using annualized income installment method to reduce/eliminate penalty. For example, in my case, I had large distribution event in December so I will pay 2021 estimated taxes for 4th period on (1/15/2022) for the distribution. I want to file form 2210 to tell the IRS, most of my income came in 4th period of 2021 so IRS doesn't try to assess penalty(basically interest) thinking I made the income through out the year.
As a 1099 contractor what you wrote above is startling to me. Not sure if this is specific to OP but I always assumed that safe harbor provisions applied to me (and my 4 "quarterly" estimated tax payments) but looking at A-D above you seem to be saying that only withholdings (and credits) apply.

In looking at IRS topic # 306, it seems to me that they are saying that both withholding AND estimated tax payments apply to C and D above.

I am reading it wrong or did you tailor your reply to the specific case outlined in the original post
I guess I did tailor the response a bit this situation since I was mainly researching salaried employee situation for my case with one-time large untaxed distribution event during the year.

C and D seems unclear to me to be honest. What I understood is that you can't backload estimated payment if your income happened in earlier periods. In that regard if you meet C & D with estimated payments, you likely do not owe any penalty as long as you made even estimated payments. If you sent uneven payments then I think Form 2210 would apply.
Katietsu
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Katietsu »

slacker2022 wrote: Mon Jan 10, 2022 10:55 pm
Katietsu wrote: Sun Jan 09, 2022 12:45 pm
slacker2022 wrote: Sun Jan 09, 2022 11:35 am. I actually did this in HRBlock software myself ( Unfortunately for me I missed safe harbor test by $50 ).
This is not really unfortunate. Without doing the actual calculation, I estimate the underpayment penalty would be rounded to $1. The IRS writes off $1 underpayment penalties thus lowering the real life penalty to $0. No need to do an annualized 2210 at all.
That's true. I only meant that now I have to figure out how to fill out Form 2210 which I haven't done before. It's probably going to be a good thing to learn how to fill it out in the long run.
Slacker2022- You do not need to use Form 2210.

From Form 2210 instructions:
The IRS Will Figure the Penalty for You

If you didn't check box B, C, or D in Part II, you don't need to figure the penalty. The IRS will figure any penalty for underpayment of estimated tax and send you a bill. If you file your return by April 15, 2021, no interest will be charged on the penalty if you pay the penalty by the date shown on the bill. If you want us to figure the penalty for you, complete your return as usual. Leave the penalty line on your return blank; don't file Form 2210.

In your case, just ignore the penalty. Ignore Form 2210. Since the penalty is so small, the IRS will write it off. You will never hear anything about it.
slacker2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by slacker2022 »

Katietsu wrote: Mon Jan 10, 2022 11:28 pm
slacker2022 wrote: Mon Jan 10, 2022 10:55 pm
Katietsu wrote: Sun Jan 09, 2022 12:45 pm
slacker2022 wrote: Sun Jan 09, 2022 11:35 am. I actually did this in HRBlock software myself ( Unfortunately for me I missed safe harbor test by $50 ).
This is not really unfortunate. Without doing the actual calculation, I estimate the underpayment penalty would be rounded to $1. The IRS writes off $1 underpayment penalties thus lowering the real life penalty to $0. No need to do an annualized 2210 at all.
That's true. I only meant that now I have to figure out how to fill out Form 2210 which I haven't done before. It's probably going to be a good thing to learn how to fill it out in the long run.
Slacker2022- You do not need to use Form 2210.

From Form 2210 instructions:
The IRS Will Figure the Penalty for You

If you didn't check box B, C, or D in Part II, you don't need to figure the penalty. The IRS will figure any penalty for underpayment of estimated tax and send you a bill. If you file your return by April 15, 2021, no interest will be charged on the penalty if you pay the penalty by the date shown on the bill. If you want us to figure the penalty for you, complete your return as usual. Leave the penalty line on your return blank; don't file Form 2210.

In your case, just ignore the penalty. Ignore Form 2210. Since the penalty is so small, the IRS will write it off. You will never hear anything about it.
If it was going to be $100 or something, I would just pay and not worry about it but the distribution in December was fairly substantial. I didn't have a say in the timing. Even with the estimated tax paid by 1/15/2022, my back of the napkin calculation is something like $500-$750 at the current 3% interest rate for underpayment prorated for each period.
ZWorkLess
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by ZWorkLess »

It's too late for 2021, but in the future, you might consider making excess w-2 withholdings in place of some/all of the estimated tax payments. This eliminates the uneven payment issue, as w-2 withholdings aren't measured that way. We have been able to do nearly all our income taxes this way for many years, even though only about 1/3 of our income is w-2. We just ramp up withholdings as needed, sometimes ending up with close to $0 paychecks the final pay periods. We happen to own our own business, so changing withholdings is easy peasey, but if your employer doesn't mind, you should be able to change your tax withholdings at any time.
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by RetiredAL »

I think there is an excess of paranoia to the term "penalty".

After Mom passed and my Dad was filing as single, he got hit with a large year-end CapGain/distribution in his managed account, just like many are complaining about here recently. For an under-withholding of more than $7000, the penalty was in the $70 dollar range.

I largely fixed the surprise factor by getting my Dad to allow me to dump the advisor thus getting rid of all the trading the program did. Since his retirement and SS more than covered his expenses, he did not need the income that this account's program was designed to generate.

Plus each year when I do his RMD, I adjust it's withholdings to stay within a safe harbor instead doing doing estimated payments.
Katietsu
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Katietsu »

slacker2022 wrote: Mon Jan 10, 2022 11:49 pm
Katietsu wrote: Mon Jan 10, 2022 11:28 pm
slacker2022 wrote: Mon Jan 10, 2022 10:55 pm
Katietsu wrote: Sun Jan 09, 2022 12:45 pm
slacker2022 wrote: Sun Jan 09, 2022 11:35 am. I actually did this in HRBlock software myself ( Unfortunately for me I missed safe harbor test by $50 ).
This is not really unfortunate. Without doing the actual calculation, I estimate the underpayment penalty would be rounded to $1. The IRS writes off $1 underpayment penalties thus lowering the real life penalty to $0. No need to do an annualized 2210 at all.
That's true. I only meant that now I have to figure out how to fill out Form 2210 which I haven't done before. It's probably going to be a good thing to learn how to fill it out in the long run.
Slacker2022- You do not need to use Form 2210.

From Form 2210 instructions:
The IRS Will Figure the Penalty for You

If you didn't check box B, C, or D in Part II, you don't need to figure the penalty. The IRS will figure any penalty for underpayment of estimated tax and send you a bill. If you file your return by April 15, 2021, no interest will be charged on the penalty if you pay the penalty by the date shown on the bill. If you want us to figure the penalty for you, complete your return as usual. Leave the penalty line on your return blank; don't file Form 2210.

In your case, just ignore the penalty. Ignore Form 2210. Since the penalty is so small, the IRS will write it off. You will never hear anything about it.
If it was going to be $100 or something, I would just pay and not worry about it but the distribution in December was fairly substantial. I didn't have a say in the timing. Even with the estimated tax paid by 1/15/2022, my back of the napkin calculation is something like $500-$750 at the current 3% interest rate for underpayment prorated for each period.
I am saying that you could have had a $1 million distribution in December, and based on the facts you presented, you do not need to file a Form 2210 to eliminate or reduce the penalty. The IRS will automatically calculate your lowest penalty for you using the numbers from your 2020 return and your 2021 return. If you were within $50 using the safe harbor rules based on your 2020 return, with no Form 2210, the penalty will be based on that $50 underpayment. The $50 underpayment will effectively turn into a zero dollar penalty. Look over the Form 2210 instructions paying attention to the part I quoted. If you want to file the Form 2210, then go ahead. If I misunderstood your situation about just missing the safe harbor, then you might benefit from reporting your income by quarter. Many people think that once you miss the safe harbor rules by a few bucks, you have lost any benefit from the safe harbor. It is not an all or none cliff. Walk through Form 2210 Part 1 and I think you will understand what I mean.
Last edited by Katietsu on Tue Jan 11, 2022 12:23 pm, edited 1 time in total.
Running Bum
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Running Bum »

GreendaleCC wrote: Sun Jan 09, 2022 11:07 am
diy60 wrote: Sun Jan 09, 2022 10:43 am
nrkv wrote: I read recently that making uneven payments means showing IRS when the money is made.
I believe this is false.
No, this is true! The “regular” tax return methodology only assumes equally distributed earnings throughout the year, so only treats equally-sized payments of quarterly estimated taxes as “on-time” payments.

If you don’t make equal estimated tax payments, there is an option to files taxes in a way that accounts for earnings and tax payments on a quarter-by-quarter basis so the IRS can understand whether or not they matched during the year. I had to do this one year and used TurboTax to do it. You want the “annualized income installment method.”
No, the IRS assumes you made the money evenly throughout the year unless you show otherwise on form 2210.

So if you unexpectedly make more money during the year, if you leave your tax payments even throughout the year based on the expected income, you are going to owe more taxes at tax time, and could be hit with underpayment penalties then. If instead you increased your estimated quarterly payments, they might still tag you with an underpayment penalty due to the timing, but if you fill out form 2210 you can prove you paid the extra tax for the quarter in which it was earned, you won't owe a penalty.
diy60
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by diy60 »

GreendaleCC wrote: Sun Jan 09, 2022 11:07 am
diy60 wrote: Sun Jan 09, 2022 10:43 am
nrkv wrote: I read recently that making uneven payments means showing IRS when the money is made.
I believe this is false.
No, this is true! The “regular” tax return methodology only assumes equally distributed earnings throughout the year, so only treats equally-sized payments of quarterly estimated taxes as “on-time” payments.

If you don’t make equal estimated tax payments, there is an option to files taxes in a way that accounts for earnings and tax payments on a quarter-by-quarter basis so the IRS can understand whether or not they matched during the year. I had to do this one year and used TurboTax to do it. You want the “annualized income installment method.”
The bolded part is incorrect. I use part IV Regular Method every year because I pay in unequal amounts. Technically, the IRS instructions state not to file the form if none of the boxes are checked, but I do so anyway. The Regular Method default assumption is income is earned evenly throughout the year, and easily accommodates uneven payment situation. If you remain "ahead" of your cumulative quarterly tax liability then it is mathematically impossible to owe a penalty. Uneven payments can absolutely be "timely".
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by tibbitts »

It seems like using HRBlock software I wasn't given the opportunity to file the form; it just told me I might owe a penalty and the IRS would calculate it. But I knew I didn't so all was well. I wouldn't like feeling I had penalties and interest hanging over me that the IRS wouldn't tell me about for... decades, centuries, whatever.
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neurosphere
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by neurosphere »

diy60 wrote: Tue Jan 11, 2022 12:29 pm
GreendaleCC wrote: Sun Jan 09, 2022 11:07 am
diy60 wrote: Sun Jan 09, 2022 10:43 am
nrkv wrote: I read recently that making uneven payments means showing IRS when the money is made.
I believe this is false.
No, this is true! The “regular” tax return methodology only assumes equally distributed earnings throughout the year, so only treats equally-sized payments of quarterly estimated taxes as “on-time” payments.

If you don’t make equal estimated tax payments, there is an option to files taxes in a way that accounts for earnings and tax payments on a quarter-by-quarter basis so the IRS can understand whether or not they matched during the year. I had to do this one year and used TurboTax to do it. You want the “annualized income installment method.”
The bolded part is incorrect. I use part IV Regular Method every year because I pay in unequal amounts. Technically, the IRS instructions state not to file the form if none of the boxes are checked, but I do so anyway. The Regular Method default assumption is income is earned evenly throughout the year, and easily accommodates uneven payment situation. If you remain "ahead" of your cumulative quarterly tax liability then it is mathematically impossible to owe a penalty. Uneven payments can absolutely be "timely".
The bold/underlined text is important. And forgive me if it's already been addressed earlier in this thread, as I only read a couple of posts.

For a long time I was confused by talk of "equal" payments. But then conceptually I realized that equal payments are typically in reference to a floor or minium amount each quarter to satisfy some overall annual minimum payment requirement. That is, if you are supposed to pay $100 x 4 you can't pay 100/100/50/150. Yes you paid the total necessary amount, but they were not "equal" and timely. However if you instead do 300/100/0/0, these ARE "equal", in that you were supposed to make 4 equal payments of $100 by the respective deadlines, and you DID. You simply paid them early. $200 from Q1 rolled over to Q2, but then you made the "equal" payment in Q2 so the $200 rolled over to Q3 and another $100 to Q4.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
Pete3
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Pete3 »

neurosphere wrote: Tue Jan 11, 2022 12:56 pm However if you instead do 300/100/0/0, these ARE "equal", in that you were supposed to make 4 equal payments of $100 by the respective deadlines, and you DID. You simply paid them early. $200 from Q1 rolled over to Q2, but then you made the "equal" payment in Q2 so the $200 rolled over to Q3 and another $100 to Q4.
This is how I handle it, make the early quarterly estimated payments higher and then reduce the last payment in Jan based on a rough estimate of where I think I am for the year (since at that point the books are closed). I assumed that the IRS would never treat front-loading my payments as a problem (unequal payments) since it benefits them not me.
diy60
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by diy60 »

Pete3 wrote: Tue Jan 11, 2022 1:22 pm
neurosphere wrote: Tue Jan 11, 2022 12:56 pm However if you instead do 300/100/0/0, these ARE "equal", in that you were supposed to make 4 equal payments of $100 by the respective deadlines, and you DID. You simply paid them early. $200 from Q1 rolled over to Q2, but then you made the "equal" payment in Q2 so the $200 rolled over to Q3 and another $100 to Q4.
This is how I handle it, make the early quarterly estimated payments higher and then reduce the last payment in Jan based on a rough estimate of where I think I am for the year (since at that point the books are closed). I assumed that the IRS would never treat front-loading my payments as a problem (unequal payments) since it benefits them not me.
Yes, you both have it correct. My strategy has been 30%/30%/30%/10%. This allows me to tweak my year-end Roth conversions and controls my expenses during Dec & Jan (typically high expense months for me). The beauty of it is you are not required to submit form 2210 in this situation, as the IRS has all of the info (your income and estimated payment history). They'll do the calculation for you, which mathematically can only result in a $0 penalty.
diy60
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by diy60 »

tibbitts wrote: Tue Jan 11, 2022 12:55 pm It seems like using HRBlock software I wasn't given the opportunity to file the form; it just told me I might owe a penalty and the IRS would calculate it. But I knew I didn't so all was well. I wouldn't like feeling I had penalties and interest hanging over me that the IRS wouldn't tell me about for... decades, centuries, whatever.
Yes, this is consistent with the bolded instructions on line 19 of form 2210. H&R Block probably filled out the form in the background but there was no reason to submit it. If you still have your last year's H&R tax software installed, you can bring up your return, click "forms", search for 2210, click on it to open the form, and review lines 18 thru 26. You will quickly see how the calculations are made, and as long as you stayed "ahead or equal to" your cumulative quarterly tax liability you could never owe a penalty.
GreendaleCC
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by GreendaleCC »

neurosphere wrote: Tue Jan 11, 2022 12:56 pm
diy60 wrote: Tue Jan 11, 2022 12:29 pm
GreendaleCC wrote: Sun Jan 09, 2022 11:07 am
diy60 wrote: Sun Jan 09, 2022 10:43 am
nrkv wrote: I read recently that making uneven payments means showing IRS when the money is made.
I believe this is false.
No, this is true! The “regular” tax return methodology only assumes equally distributed earnings throughout the year, so only treats equally-sized payments of quarterly estimated taxes as “on-time” payments.

If you don’t make equal estimated tax payments, there is an option to files taxes in a way that accounts for earnings and tax payments on a quarter-by-quarter basis so the IRS can understand whether or not they matched during the year. I had to do this one year and used TurboTax to do it. You want the “annualized income installment method.”
The bolded part is incorrect. I use part IV Regular Method every year because I pay in unequal amounts. Technically, the IRS instructions state not to file the form if none of the boxes are checked, but I do so anyway. The Regular Method default assumption is income is earned evenly throughout the year, and easily accommodates uneven payment situation. If you remain "ahead" of your cumulative quarterly tax liability then it is mathematically impossible to owe a penalty. Uneven payments can absolutely be "timely".
The bold/underlined text is important. And forgive me if it's already been addressed earlier in this thread, as I only read a couple of posts.

For a long time I was confused by talk of "equal" payments. But then conceptually I realized that equal payments are typically in reference to a floor or minium amount each quarter to satisfy some overall annual minimum payment requirement. That is, if you are supposed to pay $100 x 4 you can't pay 100/100/50/150. Yes you paid the total necessary amount, but they were not "equal" and timely. However if you instead do 300/100/0/0, these ARE "equal", in that you were supposed to make 4 equal payments of $100 by the respective deadlines, and you DID. You simply paid them early. $200 from Q1 rolled over to Q2, but then you made the "equal" payment in Q2 so the $200 rolled over to Q3 and another $100 to Q4.
Thanks, great clarification!
random_walker_77
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by random_walker_77 »

cadreamer2015 wrote: Sun Jan 09, 2022 10:54 am You will probably want to fill out form 2210 Underpayment of Estimated Tax. If memory serves, this form does indeed ask you to allocate your income and tax payments by quarter of the year. TurboTax supports filing form 2210. If you are comfortable using TurboTax to do your taxes I don’t think you need a CPA.
You'll find out from turbotax if you have an underpayment and if there's interest owed (aka "penalties"). If you worry about that, then make an estimated tax payment by 1/15 to stop the clock on interest. If you meet the safe harbor, then there are no penalties/interest. If not, turbotax will tell you how much interest you owe. If the underpayment interest is under $20-50, you might just pay it to avoid the hassle of form 2210ai using the annualized income installment method. Otherwise, you fill in the quarterly earnings on 2210ai and see if this method saves you interest.

I doubt you need a CPA.
slacker2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by slacker2022 »

Katietsu wrote: Tue Jan 11, 2022 12:08 pm
slacker2022 wrote: Mon Jan 10, 2022 11:49 pm
Katietsu wrote: Mon Jan 10, 2022 11:28 pm
slacker2022 wrote: Mon Jan 10, 2022 10:55 pm
Katietsu wrote: Sun Jan 09, 2022 12:45 pm

This is not really unfortunate. Without doing the actual calculation, I estimate the underpayment penalty would be rounded to $1. The IRS writes off $1 underpayment penalties thus lowering the real life penalty to $0. No need to do an annualized 2210 at all.
That's true. I only meant that now I have to figure out how to fill out Form 2210 which I haven't done before. It's probably going to be a good thing to learn how to fill it out in the long run.
Slacker2022- You do not need to use Form 2210.

From Form 2210 instructions:
The IRS Will Figure the Penalty for You

If you didn't check box B, C, or D in Part II, you don't need to figure the penalty. The IRS will figure any penalty for underpayment of estimated tax and send you a bill. If you file your return by April 15, 2021, no interest will be charged on the penalty if you pay the penalty by the date shown on the bill. If you want us to figure the penalty for you, complete your return as usual. Leave the penalty line on your return blank; don't file Form 2210.

In your case, just ignore the penalty. Ignore Form 2210. Since the penalty is so small, the IRS will write it off. You will never hear anything about it.
If it was going to be $100 or something, I would just pay and not worry about it but the distribution in December was fairly substantial. I didn't have a say in the timing. Even with the estimated tax paid by 1/15/2022, my back of the napkin calculation is something like $500-$750 at the current 3% interest rate for underpayment prorated for each period.
I am saying that you could have had a $1 million distribution in December, and based on the facts you presented, you do not need to file a Form 2210 to eliminate or reduce the penalty. The IRS will automatically calculate your lowest penalty for you using the numbers from your 2020 return and your 2021 return. If you were within $50 using the safe harbor rules based on your 2020 return, with no Form 2210, the penalty will be based on that $50 underpayment. The $50 underpayment will effectively turn into a zero dollar penalty. Look over the Form 2210 instructions paying attention to the part I quoted. If you want to file the Form 2210, then go ahead. If I misunderstood your situation about just missing the safe harbor, then you might benefit from reporting your income by quarter. Many people think that once you miss the safe harbor rules by a few bucks, you have lost any benefit from the safe harbor. It is not an all or none cliff. Walk through Form 2210 Part 1 and I think you will understand what I mean.
OK. Maybe that's the detail I'm missing in my understanding of how penalties work with this kind of distribution events.

Where do I find the text that says I would be assessed on that $50 difference rather than the larger backloaded estimated tax? Someone else had mentioned something similar to what you said so I'm sure I'm not reading something correctly or I need to find different document that describes how IRS assesses penalty.

Using round numbers, 2020 tax was $20,000 and in 2021, $21,950 was withheld through employer. I missed 110% rule by $50. Because of the December event I owe additional $50,000 in federal tax. Since I missed safe harbor, I paid 4th Period estimated tax of $50,000. On Form 2210, part 1.9 I have to check box that says "Yes, You may owe a penalty but don't file Form 2210 unless one or more boxes in Part II applies" I would think Part II C applies. "Your income varied during the year and your penalty is reduced or eliminated when figured using the annualized installment method. You must figure the penalty using Schedule AI and file Form 2210"
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by cchrissyy »

slacker2022 wrote: Fri Jan 14, 2022 9:28 pmWhere do I find the text that says I would be assessed on that $50 difference rather than the larger backloaded estimated tax?
if you walk through the form for an underpayment penalty, the exercise will show you that the penalty comes from comparing your actual payments to what it would have taken to reach the safe harbor. you can play with giving yourself enormous extra income and it won't change the penalty because this year's actual income or tax bill is not the point.

edit to clarify - i'm talking about the safe harbor of 100% or 110% of last year's bill
Last edited by cchrissyy on Fri Jan 14, 2022 9:43 pm, edited 1 time in total.
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retire2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by retire2022 »

nrkv wrote: Sun Jan 09, 2022 1:49 pm I understand. I don’t want to get into trouble by being ignorant. Thanks for the response.
Op

Use the Tax Form to calculate how much you have paid year to date

https://www.taxformcalculator.com/ chose the one for your state

or you can use the version from AARP

https://www.aarp.org/money/taxes/1040_t ... lator.html

Alternatively, you could use 1040 Excel from Glen Reeves, which is free, you could donate to his endeavor should you find his product useful.

https://sites.google.com/view/incometaxspreadsheet/home
slacker2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by slacker2022 »

cchrissyy wrote: Fri Jan 14, 2022 9:32 pm
slacker2022 wrote: Fri Jan 14, 2022 9:28 pmWhere do I find the text that says I would be assessed on that $50 difference rather than the larger backloaded estimated tax?
if you walk through the form for an underpayment penalty, the exercise will show you that the penalty comes from comparing your actual payments to what it would have taken to reach the safe harbor. you can play with giving yourself enormous extra income and it won't change the penalty because this year's actual income or tax bill is not the point.
Ah. Thank you! I will walk through that penalty computational section.
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by gobel »

slacker2022 wrote: Fri Jan 14, 2022 9:28 pm Using round numbers, 2020 tax was $20,000 and in 2021, $21,950 was withheld through employer. I missed 110% rule by $50. Because of the December event I owe additional $50,000 in federal tax. Since I missed safe harbor, I paid 4th Period estimated tax of $50,000. On Form 2210, part 1.9 I have to check box that says "Yes, You may owe a penalty but don't file Form 2210 unless one or more boxes in Part II applies" I would think Part II C applies. "Your income varied during the year and your penalty is reduced or eliminated when figured using the annualized installment method. You must figure the penalty using Schedule AI and file Form 2210"
Look at form 2210 line 9 and how it is calculated. It will be 22000 in your example. Then look at line 10 and see how they calculate the penalty - you basically have a shortall of $12.50 each period. The penalty will be tiny. (I usually tell turbotax not to include it and let the IRS calculate. They will not even bill you for this small amount IME)

However, state taxes could be different. Eg. in CA if you exceed 1m AGI this year, they void the 110% safe harbor and you must hit 90% of this year's final tax to avoid penalties.
slacker2022
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by slacker2022 »

gobel wrote: Fri Jan 14, 2022 9:47 pm Look at form 2210 line 9 and how it is calculated. It will be 22000 in your example. Then look at line 10 and see how they calculate the penalty - you basically have a shortall of $12.50 each period. The penalty will be tiny. (I usually tell turbotax not to include it and let the IRS calculate. They will not even bill you for this small amount IME)

However, state taxes could be different. Eg. in CA if you exceed 1m AGI this year, they void the 110% safe harbor and you must hit 90% of this year's final tax to avoid penalties.
Thank you. Now that I looked at Part III more closely, it makes more sense what you are describing. I thought I had to fill out Schedule AI first thinking that box C applied but it looks like I'm safe this year with a very small penalty.

Thankfully, IL state safe harbor rule is just 100% previous year's state tax ( no 110% rule ) or 90% current year's state tax for safe harbor so I'm just going to send in underpayment with the tax return.
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nrkv
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by nrkv »

retire2022 wrote: Fri Jan 14, 2022 9:39 pm
nrkv wrote: Sun Jan 09, 2022 1:49 pm I understand. I don’t want to get into trouble by being ignorant. Thanks for the response.
Op

Use the Tax Form to calculate how much you have paid year to date

https://www.taxformcalculator.com/ chose the one for your state

or you can use the version from AARP

https://www.aarp.org/money/taxes/1040_t ... lator.html

Alternatively, you could use 1040 Excel from Glen Reeves, which is free, you could donate to his endeavor should you find his product useful.

https://sites.google.com/view/incometaxspreadsheet/home
I will save and refer these going forward. Thank you!
delamer
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by delamer »

Lee_WSP wrote: Sun Jan 09, 2022 1:29 pm There are two parts to the estimated taxes safe harbor rule.

1) is whether enough was paid to the IRS or not. Already covered.
2) is whether the payments were four equal payments.

If you use withholdings, the payments are treated as made throughout the year or beginning of the year or however you want to interpret the IRS. Point being, there’s no equal payments issue.

If you use quarterly estimated taxes, you need to make 4 equal payments. But the IRS calculates the payments in a specific way such that if you front load the first two payments, the last two can be lower. You can pay it all in the first quarter, half in the first quarter and half in the second quarter, 3/4 in the first quarter and spread out the rest, etc etc. I don’t have the exact language in front of me, but I’m pretty sure you can find it on the instructions sheet for the forms.
So if $10,000 in estimated payments fulfills one of the safe harbor rules:

1. Four timely payments of $2,500 will work.
2. One $10,000 payment by April 15 will work.

And other combinations in between, as long as $2,500 total has been paid by April 15, $5,000 total has been paid by June 15, $7,500 total has been paid by September 15, and $10,000 total has been paid by January 15.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
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Lee_WSP
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Re: Made a mistake of uneven estimated taxes. Do I need CPA?

Post by Lee_WSP »

delamer wrote: Sat Jan 15, 2022 2:52 pm
Lee_WSP wrote: Sun Jan 09, 2022 1:29 pm There are two parts to the estimated taxes safe harbor rule.

1) is whether enough was paid to the IRS or not. Already covered.
2) is whether the payments were four equal payments.

If you use withholdings, the payments are treated as made throughout the year or beginning of the year or however you want to interpret the IRS. Point being, there’s no equal payments issue.

If you use quarterly estimated taxes, you need to make 4 equal payments. But the IRS calculates the payments in a specific way such that if you front load the first two payments, the last two can be lower. You can pay it all in the first quarter, half in the first quarter and half in the second quarter, 3/4 in the first quarter and spread out the rest, etc etc. I don’t have the exact language in front of me, but I’m pretty sure you can find it on the instructions sheet for the forms.
So if $10,000 in estimated payments fulfills one of the safe harbor rules:

1. Four timely payments of $2,500 will work.
2. One $10,000 payment by April 15 will work.

And other combinations in between, as long as $2,500 total has been paid by April 15, $5,000 total has been paid by June 15, $7,500 total has been paid by September 15, and $10,000 total has been paid by January 15.
Yes.
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