Confirm my Understanding of Estimated Taxes

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mw1739
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Confirm my Understanding of Estimated Taxes

Post by mw1739 » Mon Jun 03, 2019 12:43 pm

Due to my inattention, we grossly underpaid our taxes in 2018, leading to a large amount due in April 2019, along with penalties. The software automatically generated estimated tax forms for 2019. My wife and I are W-2 employees with AGI < $150,000 for 2019.

Am I ok just withholding at least 90% of our 2019 tax due through my normal paycheck? I can reasonably estimate our income for the year, which will be far less than last year, so it seems silly to make the estimated payments only to get a big refund next April. I just don't want to incur any penalties for not making estimated tax payments.

Silk McCue
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Re: Confirm my Understanding of Estimated Taxes

Post by Silk McCue » Mon Jun 03, 2019 12:55 pm

There is no need to make quarterly tax payments if you are going to withhold using your W2 incomes so long as you satisfy the IRS's Safe Harbor rules. I personally wouldn't try to target too closely to 90% because "stuff" happens.

Cheers

Ybsybs
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Re: Confirm my Understanding of Estimated Taxes

Post by Ybsybs » Mon Jun 03, 2019 1:31 pm

I go for withholding 100% of what was owed last year. You can know for sure what was owed last year. This year's income and resulting taxes can surprise you.

Lee_WSP
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Re: Confirm my Understanding of Estimated Taxes

Post by Lee_WSP » Mon Jun 03, 2019 1:58 pm

You are correct, but I'd withhold at least 100% off list years taxes.

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mw1739
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Re: Confirm my Understanding of Estimated Taxes

Post by mw1739 » Mon Jun 03, 2019 2:20 pm

Ybsybs wrote:
Mon Jun 03, 2019 1:31 pm
I go for withholding 100% of what was owed last year. You can know for sure what was owed last year. This year's income and resulting taxes can surprise you.
I can estimate probably close to the nearest dollar what my compensation will be. I receive no bonuses and no stock based compensation. W-2 plus some dividends from my brokerage account. Do you still see a reason to pay 100% of last years taxes? If I hadn't sold a large position last year resulting in big capital gains, I wouldn't be in this mess.

Lee_WSP
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Re: Confirm my Understanding of Estimated Taxes

Post by Lee_WSP » Mon Jun 03, 2019 2:33 pm

mw1739 wrote:
Mon Jun 03, 2019 2:20 pm
Ybsybs wrote:
Mon Jun 03, 2019 1:31 pm
I go for withholding 100% of what was owed last year. You can know for sure what was owed last year. This year's income and resulting taxes can surprise you.
I can estimate probably close to the nearest dollar what my compensation will be. I receive no bonuses and no stock based compensation. W-2 plus some dividends from my brokerage account. Do you still see a reason to pay 100% of last years taxes? If I hadn't sold a large position last year resulting in big capital gains, I wouldn't be in this mess.
If your absolutely positively sure your taxes will be lower, then your still safe as long as you withhold enough to cover the taxes due. I think the safe harbor threshold is 90%, but 100% is safer.

100% of last year is just easier to compute.

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joe8d
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Re: Confirm my Understanding of Estimated Taxes

Post by joe8d » Mon Jun 03, 2019 8:31 pm

Ybsybs wrote:
Mon Jun 03, 2019 1:31 pm
I go for withholding 100% of what was owed last year. You can know for sure what was owed last year. This year's income and resulting taxes can surprise you.
Yes :thumbsup
All the Best, | Joe

MarkNYC
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Re: Confirm my Understanding of Estimated Taxes

Post by MarkNYC » Mon Jun 03, 2019 9:49 pm

I disagree with the recommendation to withhold 100% of prior year tax in this situation for two reasons.

First, the OP indicated that 2019 income will consist of wages and some dividends and be less than $150K. The OP implies that 2018 income was similar, except for a "big capital gain" that is certain not to recur in 2019. So with a big capital gain, 2018 AGI may have exceeded $150K, in which case 100% of 2018 tax would not provide a safe harbor regarding underpayment penalties - 110% would be required.

More importantly, the OP indicates he/she knows with reasonable accuracy what 2019 wage and dividend income will be. Let's say 2019 projected income is $120K and projected 2019 tax is $25K. If 2018 tax was $40K which included $15K of capital gain tax, it would make no sense to seek to withhold $40K in 2019 when 2019 tax is reasonably projected at $25K. Withholding 90% of current year tax will avoid a penalty. As a cushion, it might make sense to withhold 100% of projected current year tax, but it would not make sense in this situation to withhold 100% of prior year tax, and the larger the 2018 capital gain, the less sense it makes.

crossbow
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Re: Confirm my Understanding of Estimated Taxes

Post by crossbow » Mon Jun 03, 2019 10:00 pm

MarkNYC wrote:
Mon Jun 03, 2019 9:49 pm
I disagree with the recommendation to withhold 100% of prior year tax in this situation for two reasons.

First, the OP indicated that 2019 income will consist of wages and some dividends and be less than $150K. The OP implies that 2018 income was similar, except for a "big capital gain" that is certain not to recur in 2019. So with a big capital gain, 2018 AGI may have exceeded $150K, in which case 100% of 2018 tax would not provide a safe harbor regarding underpayment penalties - 110% would be required.

More importantly, the OP indicates he/she knows with reasonable accuracy what 2019 wage and dividend income will be. Let's say 2019 projected income is $120K and projected 2019 tax is $25K. If 2018 tax was $40K which included $15K of capital gain tax, it would make no sense to seek to withhold $40K in 2019 when 2019 tax is reasonably projected at $25K. Withholding 90% of current year tax will avoid a penalty. As a cushion, it might make sense to withhold 100% of projected current year tax, but it would not make sense in this situation to withhold 100% of prior year tax, and the larger the 2018 capital gain, the less sense it makes.
Not to be lazy, but these are my thoughts exactly.

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ray.james
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Re: Confirm my Understanding of Estimated Taxes

Post by ray.james » Tue Jun 04, 2019 1:05 am

I started a very similar thread on this issue with our seeing this one. I am probably going to target actual liability based on what I know and ramp up towards year end using withholding/w4 to account for actual numbers. Now always possible.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

international001
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Re: Confirm my Understanding of Estimated Taxes

Post by international001 » Tue Jun 04, 2019 5:02 am

ray.james wrote:
Tue Jun 04, 2019 1:05 am
I started a very similar thread on this issue with our seeing this one. I am probably going to target actual liability based on what I know and ramp up towards year end using withholding/w4 to account for actual numbers. Now always possible.
What is the big deal about the penalty? It's just about 5% compounding , right? You may as well invest that money and get that return or more

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mw1739
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Re: Confirm my Understanding of Estimated Taxes

Post by mw1739 » Tue Jun 04, 2019 6:05 am

MarkNYC wrote:
Mon Jun 03, 2019 9:49 pm
I disagree with the recommendation to withhold 100% of prior year tax in this situation for two reasons.

First, the OP indicated that 2019 income will consist of wages and some dividends and be less than $150K. The OP implies that 2018 income was similar, except for a "big capital gain" that is certain not to recur in 2019. So with a big capital gain, 2018 AGI may have exceeded $150K, in which case 100% of 2018 tax would not provide a safe harbor regarding underpayment penalties - 110% would be required.

More importantly, the OP indicates he/she knows with reasonable accuracy what 2019 wage and dividend income will be. Let's say 2019 projected income is $120K and projected 2019 tax is $25K. If 2018 tax was $40K which included $15K of capital gain tax, it would make no sense to seek to withhold $40K in 2019 when 2019 tax is reasonably projected at $25K. Withholding 90% of current year tax will avoid a penalty. As a cushion, it might make sense to withhold 100% of projected current year tax, but it would not make sense in this situation to withhold 100% of prior year tax, and the larger the 2018 capital gain, the less sense it makes.
Thanks for the detailed response Mark, and that was my sentiment exactly. I don't want to make an interest-free loan to Uncle Sam based on income that won't occur. I'm aiming for 100% of 2019 tax to be withheld, but at least I'll be over the 90% safe harbor.

Gill
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Re: Confirm my Understanding of Estimated Taxes

Post by Gill » Tue Jun 04, 2019 6:25 am

Mark has given you the correct advice. It would make no sense in your situation to make 2019 payments bases on your inflated 2018 tax.
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

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Pobre
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Re: Confirm my Understanding of Estimated Taxes

Post by Pobre » Tue Jun 04, 2019 6:31 am

This might help:

2019 Withholding Calculator
https://apps.irs.gov/app/withholdingcal ... /index.jsp

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Stinky
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Re: Confirm my Understanding of Estimated Taxes

Post by Stinky » Tue Jun 04, 2019 8:54 am

MarkNYC wrote:
Mon Jun 03, 2019 9:49 pm
I disagree with the recommendation to withhold 100% of prior year tax in this situation for two reasons.

First, the OP indicated that 2019 income will consist of wages and some dividends and be less than $150K. The OP implies that 2018 income was similar, except for a "big capital gain" that is certain not to recur in 2019. So with a big capital gain, 2018 AGI may have exceeded $150K, in which case 100% of 2018 tax would not provide a safe harbor regarding underpayment penalties - 110% would be required.

More importantly, the OP indicates he/she knows with reasonable accuracy what 2019 wage and dividend income will be. Let's say 2019 projected income is $120K and projected 2019 tax is $25K. If 2018 tax was $40K which included $15K of capital gain tax, it would make no sense to seek to withhold $40K in 2019 when 2019 tax is reasonably projected at $25K. Withholding 90% of current year tax will avoid a penalty. As a cushion, it might make sense to withhold 100% of projected current year tax, but it would not make sense in this situation to withhold 100% of prior year tax, and the larger the 2018 capital gain, the less sense it makes.
Very good analysis.

I would probably target just a little over 90% of 2019 taxes, just to have a small degree of conservatism. But no need to go to 100% of 2018 taxes.
It's a GREAT day to be alive - Travis Tritt

FactualFran
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Re: Confirm my Understanding of Estimated Taxes

Post by FactualFran » Tue Jun 04, 2019 2:46 pm

In addition to there being no underpayment penalty if the withholding for a year is at least 90% of the income tax for the year, there is no underpayment penalty if the income tax for a year minus the withholding for the year is less than $1,000.

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