2020 tax forecast

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diyinvestor
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Joined: Sat Jan 21, 2012 3:36 am

2020 tax forecast

Post by diyinvestor »

How can I forecast my 2020 taxes? Can I just create a “what if” tax return usIng my 2019 Turbo Tax software? How do I predict capital gains and dividends for 2020 — especially since there’s been so much market selling in 2020? I don’t want to get penalized for underpayment of taxes. I am aware that I can avoid the underpayment penalty by paying in 110% of the taxes I owed last year, but my income will be substantially less this year and I don’t want to send more tax payments in 2020 to the IRS than necessary, even if they will get refunded ultimately. Thank you.
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Stinky
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Re: 2020 tax forecast

Post by Stinky »

diyinvestor wrote: Mon May 11, 2020 8:28 am How can I forecast my 2020 taxes? Can I just create a “what if” tax return usIng my 2019 Turbo Tax software? How do I predict capital gains and dividends for 2020 — especially since there’s been so much market selling in 2020? I don’t want to get penalized for underpayment of taxes. I am aware that I can avoid the underpayment penalty by paying in 110% of the taxes I owed last year, but my income will be substantially less this year and I don’t want to send more tax payments in 2020 to the IRS than necessary, even if they will get refunded ultimately. Thank you.
To get somewhere in the range of correct, you could use the 2019 Turbo Tax.

On dividends, you should already know your first quarter payouts. You could assume that your 2nd-4th quarter payouts might be x% lower than in 2019. I might use 25% as a value of "x", but you can make your own guess, which you can refine as you see the payouts in q2 and q3.

For capital gains, that would depend totally on your investments and your pattern of selling equities/bonds/mutual funds. I own index funds, so I never see capital gains distributions. But your portfolio may be different - you may be trading individual securities, you may be in actively managed mutual funds, etc.
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Hockey10
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Re: 2020 tax forecast

Post by Hockey10 »

dcabler
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Re: 2020 tax forecast

Post by dcabler »

Check out this bogleheads wiki: https://www.bogleheads.org/wiki/Tools_and_calculators
Scroll down to the section "Personal Finance Toolbox" and you'll see 2020 case study. I used this recently to make some calculations so I could update my W4 withholdings.

Here's another one I've used in the past: http://www.taxvisor.com/taxes/

Cheers.
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tadamsmar
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Re: 2020 tax forecast

Post by tadamsmar »

diyinvestor wrote: Mon May 11, 2020 8:28 am How can I forecast my 2020 taxes? Can I just create a “what if” tax return usIng my 2019 Turbo Tax software? How do I predict capital gains and dividends for 2020 — especially since there’s been so much market selling in 2020? I don’t want to get penalized for underpayment of taxes. I am aware that I can avoid the underpayment penalty by paying in 110% of the taxes I owed last year, but my income will be substantially less this year and I don’t want to send more tax payments in 2020 to the IRS than necessary, even if they will get refunded ultimately. Thank you.
I estimate my taxes and withholding in a spreadsheet that has some of the 1040 calculations built in.

You can make quarterly estimated federal and state tax payments based on your income for the quarter, including dividends and capital gains.

I think the 2020 tax brackets are not exactly the same as 2019, so using 2019 tax software would be a bit off.

I just adjusted my paycheck withholding when I was working and never paid quarterly taxes. But, in retirement, I mostly use quarterly tax payments and my withholding nowhere near adequate to cover my federal and state taxes.

You can schedule the federal payments for a year at eftps.gov and revise them as necessary. But I have to remember to schedule each state payment online.
Last edited by tadamsmar on Mon May 11, 2020 10:02 am, edited 3 times in total.
dcabler
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Re: 2020 tax forecast

Post by dcabler »

Stinky wrote: Mon May 11, 2020 8:35 am
diyinvestor wrote: Mon May 11, 2020 8:28 am How can I forecast my 2020 taxes? Can I just create a “what if” tax return usIng my 2019 Turbo Tax software? How do I predict capital gains and dividends for 2020 — especially since there’s been so much market selling in 2020? I don’t want to get penalized for underpayment of taxes. I am aware that I can avoid the underpayment penalty by paying in 110% of the taxes I owed last year, but my income will be substantially less this year and I don’t want to send more tax payments in 2020 to the IRS than necessary, even if they will get refunded ultimately. Thank you.
To get somewhere in the range of correct, you could use the 2019 Turbo Tax.

On dividends, you should already know your first quarter payouts. You could assume that your 2nd-4th quarter payouts might be x% lower than in 2019. I might use 25% as a value of "x", but you can make your own guess, which you can refine as you see the payouts in q2 and q3.

For capital gains, that would depend totally on your investments and your pattern of selling equities/bonds/mutual funds. I own index funds, so I never see capital gains distributions. But your portfolio may be different - you may be trading individual securities, you may be in actively managed mutual funds, etc.
+1 on guessing div/cap gains. I tend to look at the actuals each quarter and compare to the previous year, then update my W4 if needed. I can usually get pretty close, but since many funds make one final update in December, it's important to check it and make a quick update for the last couple of paychecks, especially if there are any surprises.
kaneohe
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Re: 2020 tax forecast

Post by kaneohe »

since you already know that the 110% safe harbor(based on last yr) will be way too much, your only choice is the
90% of current yr safe harbor. Since there is much more uncertainty on current yr data, all you can do is forecast and forecast and forecast again each quarter and make changes to your payments as you go along.....preferably by
withholding. Sch AI of F2210 will help minimize penalties if you can tolerate doing it.
Alan S.
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Re: 2020 tax forecast

Post by Alan S. »

Underpayment interest rate is 5% for the first two quarters, however the last 2 quarters should be little more than 3%.

That said, the IRS is likely to be very lenient on levying this penalty given the chaotic circumstances of massive job loss and dislocation with the safe harbor moving to 90% of current year for many more people. But even though these rates are dropping, they remain considerably higher than what you can get by holding the money. In addition, if you grossly underpay there are additional penalties.

Beware of mutual funds that have been or will be forced to sell their winners to meet redemption demand, as that can result in large cap gains at the end of a huge down year, taking investors by surprise.
MJS
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Re: 2020 tax forecast

Post by MJS »

kaneohe wrote: Mon May 11, 2020 9:29 am the 110% safe harbor(based on last yr) will be way too much, your only choice is the 90% of current yr safe harbor.
Or "... if the total tax shown on your return minus the amount you paid through withholding is less than $1,000." Optimally, you would owe $999, but I usually aim for owing $850.
https://www.hrblock.com/tax-center/irs/ ... x-penalty/
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