Forgot to start quarterly income tax payments this year, is it too late?

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mc510
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Forgot to start quarterly income tax payments this year, is it too late?

Post by mc510 » Mon Jun 29, 2020 1:08 pm

Last year we got dinged with an underwithholding penalty, which I think was the result of employment changes and substantial increases in mutual fund distributions. I meant to start quarterly estimated payments, but didn't get around to it :oops: . Is it too late to start up and avoid a penalty for 2020, since I missed the first quarterly payment?

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Nicolas
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Re: Forgot to start quarterly income tax payments this year, is it too late?

Post by Nicolas » Mon Jun 29, 2020 1:09 pm

You didn’t miss it. The first two payments are both due July 15 this year due to C19.

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mc510
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Re: Forgot to start quarterly income tax payments this year, is it too late?

Post by mc510 » Mon Jun 29, 2020 1:29 pm

Oh, wow; saved by COVID-19!

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Stinky
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Re: Forgot to start quarterly income tax payments this year, is it too late?

Post by Stinky » Mon Jun 29, 2020 1:30 pm

mc510 wrote:
Mon Jun 29, 2020 1:29 pm
Oh, wow; saved by COVID-19!
One of the few good things to come out of COVID.
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jebmke
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Re: Forgot to start quarterly income tax payments this year, is it too late?

Post by jebmke » Mon Jun 29, 2020 1:33 pm

If you are not already enrolled, you might want to look at setting up an account with EFTPS; you can schedule all estimated tax payments in advance and then you don't have to remember to make them.
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Re: Forgot to start quarterly income tax payments this year, is it too late?

Post by grabiner » Mon Jun 29, 2020 10:30 pm

Even if you are late (which doesn't apply this year yet), you avoid most of the penalty by paying as early as possible. Without the COVID adjustment, if you paid your first two quarters' estimated taxes now, the penalty would be two and a half months of interest on the payment due on April 15 (likely about 1% of the payment) and half a month of interest on the payment due on June 15 (a trivial amount).
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dratkinson
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Re: Forgot to start quarterly income tax payments this year, is it too late?

Post by dratkinson » Tue Jun 30, 2020 1:42 am

If you are still employed, why not just increase your employer withholdings---fed + state?. Would seem to be a simpler option. (My faulty memory recalls employer withholdings are assumed to be "on time".)


Disclosure. I assume investment distributions will increase 10%/yr, and withhold enough to cover that. So employer covers withholdings for salary/pension, and I add enough extra for dividends. In most years this means I get a little back, because I make no allowances for the tax benefit of QDI income. I prefer that to sending in quarterly payments.


Can search forum for links to tax withholdings calculators.
Search: http://www.google.com/search?q=tax+with ... rg%2Fforum
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

lstone19
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Re: Forgot to start quarterly income tax payments this year, is it too late?

Post by lstone19 » Tue Jun 30, 2020 7:39 am

dratkinson wrote:
Tue Jun 30, 2020 1:42 am
If you are still employed, why not just increase your employer withholdings---fed + state?. Would seem to be a simpler option. (My faulty memory recalls employer withholdings are assumed to be "on time".)
It is more correct to say that withholding is assumed to have been equally distributed across the year - 25% to each quarter. I don't like saying "assumed to be on time" because "on time" may mean different things to different people and once you throw in non-equal estimated payments, might lead someone to think they've met a safe harbor when they haven't. If you had a lot of withholding early in the year, you can use actual dates of withholding by marking the appropriate exception on Form 2210.

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dratkinson
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Re: Forgot to start quarterly income tax payments this year, is it too late?

Post by dratkinson » Tue Jun 30, 2020 1:02 pm

lstone19 wrote:
Tue Jun 30, 2020 7:39 am
dratkinson wrote:
Tue Jun 30, 2020 1:42 am
If you are still employed, why not just increase your employer withholdings---fed + state?. Would seem to be a simpler option. (My faulty memory recalls employer withholdings are assumed to be "on time".)
It is more correct to say that withholding is assumed to have been equally distributed across the year - 25% to each quarter. I don't like saying "assumed to be on time" because "on time" may mean different things to different people and once you throw in non-equal estimated payments, might lead someone to think they've met a safe harbor when they haven't. If you had a lot of withholding early in the year, you can use actual dates of withholding by marking the appropriate exception on Form 2210.

The short answer. I believe employer withholding can do everything OP needs done. But if he didn’t start employer withholding in January, then concede he will need to make estimated tax payments to catch up. Then step up employer withholdings to keep up.

I’m not familiar with the mechanics. Can OP make first 2 quarterly estimated tax payments, and then have next 2 quarterly tax payments be zero because he’s withholding more through his employer?



The long answer.

Thanks for the clarification, couldn't remember the wording I'd read.


I've never needed to pay taxes quarterly, employer withholding has always been sufficient.


Went looking to understand OP's issue. Will save information for when I win the lottery.
"When are quarterly estimated tax payments due?": https://www.irs.gov/faqs/estimated-tax/ ... ividuals-2


Since most large investment distributions are at year end, and I'm front-loading withholdings through my employer, I don't need to worry about under withholding.

Believe OP could do the same---use employer withholdings to cover his investment distributions. Why? They are generally uniform during the year, largest at year end, and he's withholding early for them. Saves the hassle of needing to make estimated quarterly tax payments.

OP's under withholding due to swapping jobs (last year) should be an infrequent occurrence, and a lesson learned. But still, if caught in time could have been handled by increasing his employer withholding.

Suggestion.
--Assuming you didn't change jobs this year, so that gotcha is missing.
--Look at total investment distributions last year. Assume distributions this year will be 110% of last year's.
--Adjust your employer withholding (fed+state) to cover total tax owed---employment + 10% distribution increase. Meaning you are front-loading withholdings to cover annual distributions (largest at year end).

If your investments are tax efficient---you get, but ignore the QDI tax benefit for the purpose of withholding---then you should be okay without estimated quarterly tax payments. (It's what I do: withhold assuming 10% equity distribution increase and all equity distributions are ordinary income.)



Disclosure. Back in March, when folks were considering using dry powder to buy low, I did think about it. But decided against it because I'd owe CGs tax to sell bonds. And my employer income/withholdings are insufficient to handle the CG tax. So I'd need to learn how to make quarterly tax payments. And I was too lazy to do that. So I didn't use dry powder to buy low in March.

Several years back, I put my bonds (munis) in taxable, to shoot for the moon with equities in my Roth. But with the market increase since ~2009, all new money has been used to buy bonds in an attempt to keep my AA in balance. But since muni distributions are tax exempt, so buying more has not significantly increased my need to withhold more since ~2009.


I looked through OP's prior posts and didn't immediately see a portfolio review. If OP has not done so, now might be a good time to review his investments for tax efficiency.
See Wiki: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Disclosure. After my portfolio review, my tax bite was approximately halved. Thank you, BHs.


Suggestion. OP, look through your 1099DIVs from last/this year. Compute the percentage of QDI income received. (QDI% = box 1b/box 1a) For reference: TSM produces >90% QDI, TISM >70% QDI and ~7% FTC. You'll want to consider selling less tax efficient investments.


Suggestion. After getting your year-end 1099DIVs, add 10% and use that amount to increase your employer withholdings for the coming year. If you assume all dividends are ordinary income, then you have an additional safety pad built into your assumption of annual dividends in the coming year.


Suggestion. Livesoft has another idea to increase tax efficiency. What? Review our Sch B. Why?

Sch B part 1. Consider eliminating everything here. Why? It’s all taxed as ordinary income. (I got rid of CDs, savings bonds, and stopped chasing teaser rates and account opening bonuses.)

Sch B part 2. Everything reported here should have offsetting tax benefits for QDI (the higher the QDI percentage, the better), LTCG, FTC, or tax-exempt dividends. (I used CD+savings bond proceeds to add a single-state muni for the higher yield and fed+state tax benefits.)

Since bonds (munis) can lose 5-15% during a crash and I no longer have principal-protected CDs and savings bond, what to do? Simple, I increased my muni EF tier to ~120% (=1/(1-.15)) of anticipated need and stopped worrying.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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