IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Dirghatamas
Posts: 511
Joined: Fri Jan 01, 2016 6:18 pm

IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by Dirghatamas »

Yes I have read the IRS release as well as the Bogleheads existing threads on the topic.I am still confused about the tax year 2019 (not 2020) estimated taxes underpayment penalty (as part of 2019 taxes that are normally due on April 15th 2020) so asking in this thread.

Situation: As a high earner whose income comes from salary, variable bonuses, RSU, options, dividends from index funds..calculating the withholding every month/quarter to be correct at the end of year is highly nontrivial so I don't bother and just keep it close enough. The standard BKM is to estimate quarterly taxes and pay them each quarter to avoid "estimated taxes underpayment penalty". This involves a fair bit of time spent every quarter, instead of spending time just once per year on taxes. A long time (maybe 15 years back), i had evaluated the pros and cons of paying estimated taxes each quarter vs. just ignoring them and pay everything at year end (April 15th) including the "penalty". Given that all my assets are always invested (always 100% global world stocks), I had concluded that the "penalty rate" charged by IRS = fed rate + 3% is close enough to break even of expected equity returns that on average I wouldn't gain or lose anything by ignoring estimated taxes and simply pay at year end. So, that's what I have done every year since then. Note that the interest/ penalty rate grossly increases after April 15 so it doesn't make sense to delay payments after that (say to October with extension).

2020 IRS deadline confusion: In March and April, the normal April 15 deadline was extended to July 15 with the wording in the release " no penalty or interest" for this change. Later it was clarified that estimated taxes for 2020 year were also extended. So far so good. But what about the estimated taxes underpayment penalty/interest for the 2019 taxes? It wasn't clear so I looked at the IRS site in their FAQ. It says " No, the relief does not change the estimated tax requirements or estimated tax penalty for 2019. Relief from the penalty may be available under the normal rules. See Form 2210 (for individuals) or Form 2220 (for corporations) and the instructions for either form for details.

The IRS FAQ is at
https://www.irs.gov/newsroom/filing-and ... nd-answers

So, now I am confused. If I pay my 2019 income taxes say today vs. waiting for June or July, does penalty/interest accrue since April 15th or not? The initial release by IRS made me think "no interest or penalty is due" but now I am confused given the IRS official FAQ.. :confused
Silk McCue
Posts: 4806
Joined: Thu Feb 25, 2016 7:11 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by Silk McCue »

If a penalty wouldn't have been due on 4/15 one will not be due on 7/15.

Cheers
pshonore
Posts: 6876
Joined: Sun Jun 28, 2009 2:21 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by pshonore »

The 4th quarter payment was due on 1/15/20. As long as you made that on time in the proper amount as well as the previous quarters (if any), there should be no additional penalty due in July. If you did not, there will be a penalty assessed through April 15.
Topic Author
Dirghatamas
Posts: 511
Joined: Fri Jan 01, 2016 6:18 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by Dirghatamas »

pshonore wrote: Tue May 12, 2020 12:34 pm The 4th quarter payment was due on 1/15/20. As long as you made that on time in the proper amount as well as the previous quarters (if any), there should be no additional penalty due in July. If you did not, there will be a penalty assessed through April 15.
Thanks pshonore but it didn't really answer my question which is more subtle.

Because calculating estimated taxes precisely each quarter is time consuming, each year what I do is make it "close enough" by with holdings for tax year N 100% of my total taxes owed in year N-1. So, (just as examples), lets say in 2018 my total tax burden fed + state was $800K. In year 2019, I would withhold 800K. Because I have no way to guess this precisely, my actual 2019 tax burden could be (say) anywhere from 600K to 1M. That's fine, normally on April 15th, I would either get a refund or pay the due + a small penalty (which is ~5% of the underpayment and changes with fed rate). On average, I had estimated long back, that this penalty/interest is break even vs. invested returns, so it makes sense by reducing my time spent on taxes.

The only way to avoid this penalty every year is to OVER PAY your taxes by using the safe harbor rule where you pay 110% of your taxes from last year as with holding...and I am not willing to do that due to the time value of money invested.

New for 2020: I haven't done my 2019 taxes yet but let's say I find out after doing them that my income went up slightly and my tax burden went from 800K to 900K (just as examples). Given each year my with holding = taxes from year N-1, in April, I would have paid 100K + ~5% ~5K extra.

The subtle part which is not explained well by IRS releases, is this: If we file and pay taxes on July 15th instead of April 15th, will the penalty/interest stop on April 15th or continue to increase? Lets say I had to pay 5K interest on April 15th in my example, would I pay more in July (at 5% rate) or the clock basically stopped in April and my total tax burden for 2019 would be the same in Jly as April.

The spirit of the IRS release seemed to indicate that it would be the same but the letter of the law in the FAQ seems (to my reading) indicate otherwise: basically I would pay interest/penalty for 90 more days..
Silk McCue
Posts: 4806
Joined: Thu Feb 25, 2016 7:11 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by Silk McCue »

Dirghatamas wrote: Tue May 12, 2020 1:46 pm
New for 2020: I haven't done my 2019 taxes yet but let's say I find out after doing them that my income went up slightly and my tax burden went from 800K to 900K (just as examples). Given each year my with holding = taxes from year N-1, in April, I would have paid 100K + ~5% ~5K extra.
Why haven't you already roughed out your taxes earlier in the year or finalized by now to determine whether or not you have a penalties and interest? This makes no sense to me. If you have not penalties and interest due then this is just an interesting discussion and not an actionable post.

Cheers
MarkNYC
Posts: 1828
Joined: Mon May 05, 2008 7:58 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by MarkNYC »

Dirghatamas wrote: Tue May 12, 2020 1:46 pm The subtle part which is not explained well by IRS releases, is this: If we file and pay taxes on July 15th instead of April 15th, will the penalty/interest stop on April 15th or continue to increase? Lets say I had to pay 5K interest on April 15th in my example, would I pay more in July (at 5% rate) or the clock basically stopped in April and my total tax burden for 2019 would be the same in July as April.

The spirit of the IRS release seemed to indicate that it would be the same but the letter of the law in the FAQ seems (to my reading) indicate otherwise: basically I would pay interest/penalty for 90 more days..
A 2019 underpayment penalty, if it applies, will be locked-in as of April 15, 2020, meaning it will be unaffected by how much or when you eventually pay the balance of your 2019 tax.

In a normal year, any tax unpaid by April 15th of the following year would begin on April 16th to accrue interest and possibly late-payment penalties. This year, interest and late penalties will not apply if the tax is fully paid by July 15th.
Last edited by MarkNYC on Tue May 12, 2020 3:01 pm, edited 1 time in total.
FactualFran
Posts: 1141
Joined: Sat Feb 21, 2015 2:29 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by FactualFran »

Dirghatamas wrote: Tue May 12, 2020 1:46 pm The subtle part which is not explained well by IRS releases, is this: If we file and pay taxes on July 15th instead of April 15th, will the penalty/interest stop on April 15th or continue to increase? Lets say I had to pay 5K interest on April 15th in my example, would I pay more in July (at 5% rate) or the clock basically stopped in April and my total tax burden for 2019 would be the same in Jly as April.
The III. Grant of Relief section of IRS Notice 2020-18 contains the paragraph
As a result of the postponement of the due date for filing Federal income tax returns and making Federal income tax payments from April 15, 2020, to July 15, 2020, the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice. Interest, penalties, and additions to tax with respect to such postponed Federal income tax filings and payments will begin to accrue on July 16, 2020.
I suspect that the "any" in "any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice" includes underpayment penalties.
Topic Author
Dirghatamas
Posts: 511
Joined: Fri Jan 01, 2016 6:18 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by Dirghatamas »

MarkNYC wrote: Tue May 12, 2020 2:28 pm A 2019 underpayment penalty, if it applies, will be locked-in as of April 15, 2020, meaning it will be unaffected by how much or when you eventually pay the balance of your 2019 tax.

In a normal year, any tax unpaid by April 15th of the following year would begin on April 16th to accrue interest and possibly late-payment penalties. This year, interest and late penalties will not apply if the tax is fully paid by July 15th.
Thank you much Mark! This answers my question precisely. Your interpretation is how I had read the original release from IRS but got confused with the FAQ from IRS. Really busy right now with work + COVID related extra household overhead so will deal with taxes in late June (because there is no financial drawback to delaying it till July 15).
Topic Author
Dirghatamas
Posts: 511
Joined: Fri Jan 01, 2016 6:18 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by Dirghatamas »

FactualFran wrote: Tue May 12, 2020 2:33 pm The III. Grant of Relief section of IRS Notice 2020-18 contains the paragraph
As a result of the postponement of the due date for filing Federal income tax returns and making Federal income tax payments from April 15, 2020, to July 15, 2020, the period beginning on April 15, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice. Interest, penalties, and additions to tax with respect to such postponed Federal income tax filings and payments will begin to accrue on July 16, 2020.
I suspect that the "any" in "any interest, penalty, or addition to tax for failure to file the Federal income tax returns or to pay the Federal income taxes postponed by this notice" includes underpayment penalties.
Thank you FactualFran. I had read the IRS notice you quote and concluded the same. However the FAQ (also posted at the IRS site) seemed (to my reading) indicate otherwise so was confused. I am just an engineer, not a tax guy so wasn't sure.

Your and Mark's interpretation is the same and consistent with my original reading (and the spirit of the COVID/IRS notice) so I will go with that and do my taxes in late June.
Topic Author
Dirghatamas
Posts: 511
Joined: Fri Jan 01, 2016 6:18 pm

Re: IRS July 15 deadline impact on 2019 (not 2020) estimated taxes interest

Post by Dirghatamas »

Silk McCue wrote: Tue May 12, 2020 2:04 pm Why haven't you already roughed out your taxes earlier in the year or finalized by now to determine whether or not you have a penalties and interest? This makes no sense to me. If you have not penalties and interest due then this is just an interesting discussion and not an actionable post.

Cheers
Sorry but this is NOT helpful. Mark and FactualFran already answered my question in this thread (much thanks). It took me less than a minute looking at my W2 + 1099s to realize that my income could likely be ~200-250K more than last year (which means I will owe taxes because my with holding each year = last year's taxes). However doing the full, detailed taxes takes me ~ 2 days due to its complexity (W2, RSU, options, ESPP, qualified vs. non qualified dividends, foreign tax credit, TLH and capital gain entries, deductions, HSA, charity/gifts..).

So, in a minute spent, I know I will owe taxes but if the taxes owed in July are the same as in April (spirit of the IRS notice), then it makes logical sense to file taxes when it is convenient. Right now is fairly inconvenient for me to spend 2 days doing detailed taxes while workign from home, dealing with COVID overhead in my household etc. Many other people on this board may be in my situation. Given Mark and FactualFran's helpful posts, it allows people like me to defer the deatailed work to later (likely late June for me), instead of now.
Post Reply