IRS 2210 Penalty vs ES-1040 vs Withholding

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ps56k
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IRS 2210 Penalty vs ES-1040 vs Withholding

Post by ps56k »

Have some large Cap Gains and Divs in the last couple of years, and the resulting tax due has been more than usual.

SO... thought I would jump on the ES-140 forms, and pay the end of year tax due spread out during the year.
Now... TurboTax is calculating a Form 2210 Penalty,
as it seems that if I do the ES-1040 payments spread out during the year,
I need to pay a good portion of the total tax due... vs just the amount I would pay at the end of the year.

Total tax due = $36,000
Tax withheld = $12,000
Tax payment due last year for 2016 = $24,000 plus $400 penalty

Figured I would spread out the payments during 2017 with the ES-1040,
and even with the ES-1040 payments last year of $20,000 (4 x $5,000) there is still a penalty,
as TurboTax is calculating a required ES-1040 payment of ..... $8,300 or a total of $33,200 vs my deficit of just $24,000.

What approach and general amount should I pay forward with my ES-1040 payments ?
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BL
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by BL »

Is increased withholding a possibility? That could be done any time during the year.

If CG is not from selling, perhaps your taxable funds are not as tax-efficient as they could be (see tax-efficient placement table in Wiki:
https://www.bogleheads.org/wiki/Tax-eff ... _placement
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Epsilon Delta
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by Epsilon Delta »

ps56k wrote: Thu Feb 22, 2018 4:07 pm
Figured I would spread out the payments during 2017 with the ES-1040,
and even with the ES-1040 payments last year of $20,000 (4 x $5,000) there is still a penalty,
as TurboTax is calculating a required ES-1040 payment of ..... $8,300 or a total of $33,200 vs my deficit of just $24,000.

What approach and general amount should I pay forward with my ES-1040 payments ?
I'm afraid I don't fully understand your post. Your forms and tax years don't make sense to me.

Are you saying that you owe a penalty for underpayment in 2017 and you are trying to understand this? This penalty would be a 2017 form 2210 (not ES-1040)? If this is the case did you have any withholding in 2017?

Or are you saying the TurboTax is printing ES-1040 for 2018 and you are wondering why it requires a $8,300 quarterly payment instead of the $5,000 quarterly payments you made in 2017? The most likely issue here would be that you did not tell TT that you expect $12,000 in withholding in 2018. This would be on line 15 of the "2017 Estimated Tax Worksheet" in the 1040-ES. I can't find a 2018 1040-ES at the IRS so if TT is printing one it is probably mocking one up based on the 2017 version.
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ps56k
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by ps56k »

Here is what things look like....

For 2016 taxes - had a large Cap Gain, and large resulting end of year taxes...
Taxes = $33,000
Withheld = $15,000
Tax Due = $18,000 with a Penalty of $400

SO - for 2017 taxes, which would have the same large Cap Gains,
decided to spread out that end of year anticipated $18,000 using ES-1040 payments in 2017.
Now, using TurboTax for all the 2017 taxes calcs...
Taxes = $36,000
Withheld = $12,000
ES-1040 payments in 2017 = $20,000
Total tax paid = $32,000 ($12,000 + $20,000)
Tax Due = $4,400 with a Penalty of $15

On the Penalty Form 2210 - Part IV - Section A -
it indicates I SHOULD HAVE paid 90% of the previous year taxes, which would be $33,000
The Form 2210 shows that each ES-1040 payment in 2017 should have been $8,300 vs my $5,000 to achieve this goal.

BUT -it seems that the Penalty Form 2210 is implying that ALL of the tax is paid via ES-1040, with no Withholding component.

NOW - for 2018 - same problem with large Cap Gains looming.... not sure what strategy to use....
lstone19
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by lstone19 »

ps56k wrote: Fri Feb 23, 2018 8:33 am Here is what things look like....

SO - for 2017 taxes, which would have the same large Cap Gains,
decided to spread out that end of year anticipated $18,000 using ES-1040 payments in 2017.
Now, using TurboTax for all the 2017 taxes calcs...
Taxes = $36,000
Withheld = $12,000
ES-1040 payments in 2017 = $20,000
Total tax paid = $32,000 ($12,000 + $20,000)
Tax Due = $4,400 with a Penalty of $15
You're clearly doing some rounding since $36,000 - $32,000 is $4,000, not $4,400. That makes following your issue more difficult.

On the Penalty Form 2210 - Part IV - Section A -
it indicates I SHOULD HAVE paid 90% of the previous year taxes, which would be $33,000
No, it's the lesser of 90% of THIS year's tax or 100% (110% for high income taxpayers) of the previous year's tax.
The Form 2210 shows that each ES-1040 payment in 2017 should have been $8,300 vs my $5,000 to achieve this goal.

BUT -it seems that the Penalty Form 2210 is implying that ALL of the tax is paid via ES-1040, with no Withholding component.
Not at all. It's saying your total of withholding and estimated should have been $8,300. I assume you're talking about line 18 is the quarterly installment due and that's by either withholding or estimated taxes. Line 19 is then the actual amount paid, a combination of any estimated payments that quarter plus withholding (by default, withholding is assumed to have been evenly distributed across all four quarters while estimated payments are always date specific). Since you've put the number $8,300 out there, that means your minimum for the year was $8,300 x 4 or $33,200 (more rounding at play since you said last year's was $33,000 - not that it matters that much). Since you had $12,000 withheld, $3,000 is assumed for the first quarter plus (assuming your four estimated payments were equal) $5,000 estimated means you paid $8,000 in the first quarter, $300 short of what was required. Repeat for the subsequent quarters.

Be aware that if your withholding had more early in the year, you can use the actual amounts for each quarter and if the income was more in the late part of the year, you can annualize your income. Both are more work, particularly annualizing your income, but can reduce the penalty.
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ps56k
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by ps56k »

Thanks for the reply and taking the time to walk thru the text....
I guess I'm doing the coin toss...
A - wait until the end of the year, and pay the full tax amount plus the higher penalty - but less shuffling with ES-1040's and Form 2210
B - increase my ES-1040 payments to cover the higher anticipated tax, and still let TurboTax do it's thing at the end of the year...
..... but may still not equal the "required" estimated amounts, and have a minimal tax to pay with a tiny penalty....

This year is showing 2017 tax due of $4,400 and a penalty of..... $15
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Epsilon Delta
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by Epsilon Delta »

ps56k wrote: Fri Feb 23, 2018 8:33 am NOW - for 2018 - same problem with large Cap Gains looming.... not sure what strategy to use....
I agree with what stone19 wrote, so I won't duplicate it.

It seems to me that if you expect 2018 to be like 2017 you have at least three reasonable choices.
  • Consider a $15 penalty to be close enough to zero and make the same estimated tax payments in 2018 as in 2017, and hope for a similar result.
  • Figure the penalty is 2.6% of the underpayment so you need to increase payments by $15/2.6% = $576, call it $600 and increase your estimate tax payments by $150 per quarter and hope for zero penalty. (Or since you ended up paying $4,400 you could increase the estimated tax payments by $1,100 per quarter and hope to break even. Or something between $150 and $1,100 as the whim takes you.)
  • Try to understand the safe harbors Istone19 mentioned and pay estimated taxes to meet one of the safe harbors. One way to do this is to fully understand and fill out the worksheets attached to form 1040-ES.
I believe all of these are reasonable. Some people will say "hope is not a strategy" and insist on the third, but I feel the underpayment penalties (simple interest at 3%) are mild enough that you don't need surgical precision here.

Added: I see your response. Your option B is the second option above. Some people do take your option A of not bothering with estimated taxes and just paying the penalty. This is not to my taste, but I don't think it has ever cause anybody any trouble beyond the very small financial cost.
lstone19
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by lstone19 »

ps56k wrote: Fri Feb 23, 2018 11:33 am Thanks for the reply and taking the time to walk thru the text....
I guess I'm doing the coin toss...
A - wait until the end of the year, and pay the full tax amount plus the higher penalty - but less shuffling with ES-1040's and Form 2210
B - increase my ES-1040 payments to cover the higher anticipated tax, and still let TurboTax do it's thing at the end of the year...
..... but may still not equal the "required" estimated amounts, and have a minimal tax to pay with a tiny penalty....

This year is showing 2017 tax due of $4,400 and a penalty of..... $15
To meet the 100% (110% for high income taxpayers) of the previous year's taxes safe-harbor requirement is not that difficult. Take the safe-harbor amount and divide by four. As you approach each estimated date (4/15, 6/15, 9/15, and 1/15), get withholding for the quarter from your pay stubs, subtract that from the safe-harbor amount for the quarter, and send in the difference with a 1040-ES voucher.

Note that the amounts may vary by quarter. Your 1040-ES that TT does for you is not part of your filing. The IRS is not expecting payments of any particular amount (or at all) based on your tax return. The IRS will happily accept different amounts each quarter and if it works out to skip a quarter, that's fine too.

For instance, if my 2017 taxes were $20,000, I need to have paid $5,000 by 4/15. If withholding for the 1st quarter was $3,000, I'd send in $2,000 on 4/15. Repeat on 6/15 with 2nd quarter numbers (a "next level" approach is that I need to have paid $10,000 by 6/15 and $15,000 by 9/15; if YTD withholding on 6/15 is $7,000 and I already made the $2,000 payment on 4/15 ($9,000 total), then I only need to send in another $1,000 on 6/15). Of course if your tax bill was even higher in 2018, you'd owe more on 4/15/19 but no penalty.

Note that the IRS definition of a "quarter" is wonky with the second quarter only being two months long (4/16 to 6/15).
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by pshonore »

Not to complicate matters, but if your Cap Gains,etc. come late in the year, you can reduce or skip the early quarterlies and increase the later ones. Of course you'll have to fill out Form 2210 AI which some find to be a daunting task. As long as your estimated payments match when the income was received, the IRS will not care.
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Epsilon Delta
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by Epsilon Delta »

lstone19 wrote: Fri Feb 23, 2018 12:06 pm Note that the amounts may vary by quarter.

For instance, if my 2017 taxes were $20,000, I need to have paid $5,000 by 4/15. If withholding for the 1st quarter was $3,000, I'd send in $2,000 on 4/15. Repeat on 6/15 with 2nd quarter numbers (a "next level" approach is that I need to have paid $10,000 by 6/15 and $15,000 by 9/15; if YTD withholding on 6/15 is $7,000 and I already made the $2,000 payment on 4/15 ($9,000 total), then I only need to send in another $1,000 on 6/15). Of course if your tax bill was even higher in 2018, you'd owe more on 4/15/19 but no penalty.
If your withholding varies by quarter and you take advantage of this to make your estimated payments vary by quarter you may have to file form 2210 with the regular method to avoid a penalty. This will involve digging out the end of quarter pay stubs. A lot of people try to avoid this. If you make four equal estimated payments form 2210 can be avoided, even if you owe a penalty the IRS will figure it for you if you choose.

The reason for this is that while the IRS knows the timing of your estimated payments it does not know the timing of your withholding*. Unless you file 2210 to tell the IRS when the withholding was paid, the IRS assumes the withholding was equally distributed over the year. Because of the unequal quarters this assumption often works in your favor.

* When a withholding agent such as an employer makes a periodic withholding payment they combine all the payments for a period into one lump sum, they only break it down by individual in the annual W-2 or 1099.
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ps56k
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Re: IRS 2210 Penalty vs ES-1040 vs Withholding

Post by ps56k »

Thanks for all the comments and chatter...

just as a side note - concerning ES-1040 payments...
I setup my Quicken to remind me and pay on EQUAL calendar quarters -
That way, I can see, in Quicken, my "yearly" payments as a category.

March 15 --> April - 1st voucher
June 15 --> June - 2nd voucher
Sept 15 --> Sept - 3rd voucher
Dec 15 --> January - 4th voucher
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