My Understanding of IRS Safe Harbor Rules ...

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One Ping
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My Understanding of IRS Safe Harbor Rules ...

Post by One Ping » Tue Sep 04, 2018 12:51 pm

... is you will owe no federal income tax penalty if:
  • You owe less than $1000, or
  • You've paid in at least 90% of your 2018 tax, or
  • Your adjusted gross income is <$150,000 and you've paid in at least 100% of your 2017 tax, or
  • Your adjusted gross income is >$150,000 and you've paid in at least 110% of your 2017 tax.
Given the following situation:
  • Estimated 2018 adjusted gross income: $190,000
  • Estimated 2018 income tax owed: $33,000
  • 2017 income tax owed/paid: $19,000
If you have had withheld more than $20,900 (110% of $19,000) during 2018 (e.g., from pension and SS checks), you should owe no penalty when filing 2018 income tax. You will owe roughly $12,000 more in taxes at filing time, but no penalty. Right? :?:

Edited to change 'taxable income' to 'adjusted gross income'. Thanks, walkindude. :beer
Last edited by One Ping on Tue Sep 04, 2018 3:36 pm, edited 1 time in total.
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senex
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Re: My Understanding of IRS Safe Harbor Rules ...

Post by senex » Tue Sep 04, 2018 2:19 pm

That's my reading of the 1040 instructions. For your case, no penalty.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by walkindude » Tue Sep 04, 2018 2:35 pm

I believe it's AGI over $150K that's the determinant, not taxable income. Regardless, you should be alright in your example.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by One Ping » Tue Sep 04, 2018 3:36 pm

walkindude wrote:
Tue Sep 04, 2018 2:35 pm
I believe it's AGI over $150K that's the determinant, not taxable income. Regardless, you should be alright in your example.
You are right. OP modified to reflect AGI instead of taxable income. Thanks.
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Re: My Understanding of IRS Safe Harbor Rules ...

Post by Spirit Rider » Tue Sep 04, 2018 4:40 pm

walkindude wrote:
Tue Sep 04, 2018 2:35 pm
I believe it's AGI over $150K that's the determinant, not taxable income. Regardless, you should be alright in your example.
This is correct.

Also, I wouldn't cut it too close. I might do $22,000 just to be safe.

You also, need to read the Form 1040 Instructions. It is not just Line 63. There are some less common adjustments that you don't want to bite you.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by kaneohe » Tue Sep 04, 2018 6:14 pm

One Ping wrote:
Tue Sep 04, 2018 12:51 pm
... is you will owe no federal income tax penalty if:
..................................
  • Your adjusted gross income is <$150,000 and you've paid in at least 100% of your 2017 tax, or
  • Your adjusted gross income is >$150,000 and you've paid in at least 110% of your 2017 tax.
.........................................
AGI listed above is for 2017.............you didn't provide that number and concluded 110%. Perhaps it might be 100%?

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by UpperNwGuy » Tue Sep 04, 2018 6:28 pm

If you know now that you're going to owe $33,000, why not pay at least $30,000 before the end of the year and get that behind you?

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by riverguy » Tue Sep 04, 2018 7:04 pm

UpperNwGuy wrote:
Tue Sep 04, 2018 6:28 pm
If you know now that you're going to owe $33,000, why not pay at least $30,000 before the end of the year and get that behind you?
Don't have it now, have better things to do with the money until April, have to make estimated payments if you can't withhold enough, etc, etc.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by grabiner » Tue Sep 04, 2018 8:05 pm

Spirit Rider wrote:
Tue Sep 04, 2018 4:40 pm
walkindude wrote:
Tue Sep 04, 2018 2:35 pm
I believe it's AGI over $150K that's the determinant, not taxable income. Regardless, you should be alright in your example.
This is correct.

Also, I wouldn't cut it too close. I might do $22,000 just to be safe.
If you fall short, the penalty is a percentage of the shortfall, essentially interest between the date you should have made the estimated tax payment and the date you actually made it. The penalty on a $1000 underpayment is likely to be around $20. (Some states charge significantly higher rates.)
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Re: My Understanding of IRS Safe Harbor Rules ...

Post by Spirit Rider » Tue Sep 04, 2018 8:45 pm

grabiner wrote:
Tue Sep 04, 2018 8:05 pm
If you fall short, the penalty is a percentage of the shortfall, essentially interest between the date you should have made the estimated tax payment and the date you actually made it. The penalty on a $1000 underpayment is likely to be around $20. (Some states charge significantly higher rates.)
Yes, but the penalty is based on the difference between the tax paid and the tax due.

The safe harbors themselves are a cliff. Either you meet one of them or you don't.

In the OP's example of $12,000 and the IRS' 2018 penalty interest rates to date. You are probably talking about more like a $600 penalty if you miss the previous year safe harbor by any amount.

It is wise not to cut it to close.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by kaneohe » Tue Sep 04, 2018 8:50 pm

Spirit Rider wrote:
Tue Sep 04, 2018 8:45 pm
grabiner wrote:
Tue Sep 04, 2018 8:05 pm
If you fall short, the penalty is a percentage of the shortfall, essentially interest between the date you should have made the estimated tax payment and the date you actually made it. The penalty on a $1000 underpayment is likely to be around $20. (Some states charge significantly higher rates.)
Yes, but the penalty is based on the difference between the tax paid and the tax due.

The safe harbors themselves are a cliff. Either you meet one of them or you don't.

In the OP's example of $12,000 and the IRS' 2018 penalty interest rates to date. You are probably talking about more like a $600 penalty if you miss the previous year safe harbor by any amount.

It is wise not to cut it to close.
The penalty is based on your shortfall from the safe harbor....so the penalty is graded, not a cliff.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by SoAnyway » Tue Sep 04, 2018 8:58 pm

Spirit Rider wrote:
Tue Sep 04, 2018 4:40 pm
It is not just Line 63.
Spirit Rider, is "Line 63" based on the 2017 1040? As you know, the 2018 form (and its multiple new schedules) will be completely different. Admittedly, I've not dug into the proposed new forms/schedules....

BTW, I agree with your advice to OP not to cut it too close. Income "estimates" can always be off (the closer to year-end the more accurate, but still not perfect) and there are various gremlins in the rules.

Edit: OP, thank you for your timely post. Just today, I was getting the data together to make my Q3 estimated payments. Like you, I'm trying to make sure I end the year within the safe harbor - with wiggle room as Spirit Rider suggested.
Last edited by SoAnyway on Tue Sep 04, 2018 9:09 pm, edited 1 time in total.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by Spirit Rider » Tue Sep 04, 2018 9:00 pm

kaneohe wrote:
Tue Sep 04, 2018 8:50 pm
The penalty is based on your shortfall from the safe harbor....so the penalty is graded, not a cliff.
That is contrary to my long held understanding.

I certainly could be wrong, it has happened many times before.

Do you have a substantial authority reference?

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by Spirit Rider » Tue Sep 04, 2018 9:16 pm

SoAnyway wrote:
Tue Sep 04, 2018 8:58 pm
Spirit Rider, is "Line 63" based on the 2017 1040? As you know, the 2018 form (and its multiple new schedules) will be completely different.
It would have to be based on the 2017 Form 1040 for 2018 tax returns.

It looks like the previous year safe harbor might be based on 2018 draft Form 1040 Line 15 adjusted by 2018 draft Schedule 4.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by kaneohe » Tue Sep 04, 2018 9:21 pm

https://www.irs.gov/pub/irs-pdf/f2210.pdf

This is the form you use to calculate penalty. Use p.1 to determine safe harbors based on current yr tax and
prior yr tax. p.2 takes minimum of safe harbors and compares to your payments. The difference is the base for
calculating the penalty.

Perhaps you might be thinking of IRMAA (medicare penalty for high income) which is a cliff like you mentioned.
And possibly something to do w/ Obamacare with respect to your income/premiums may be the same.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by grabiner » Tue Sep 04, 2018 9:22 pm

Spirit Rider wrote:
Tue Sep 04, 2018 9:00 pm
kaneohe wrote:
Tue Sep 04, 2018 8:50 pm
The penalty is based on your shortfall from the safe harbor....so the penalty is graded, not a cliff.
That is contrary to my long held understanding.

I certainly could be wrong, it has happened many times before.

Do you have a substantial authority reference?
IRS Form 2210 (currently the 2017 edition)

Line 5 is 90% of this year's tax. Line 8 is 100% or 110% of last year's tax. Line 9 is the lesser of these two, which is the amount you need to pay.

In the simplest case, Part III of the form determines the penalty. The underpayment on Line 14 is the difference between what you actually paid and the amount on Line 9 (copied to Line 10). The penalty in 2017 is 2.66% of the underpayment if you made your tax payment on April 15 when due, or less if you paid early. (It was a 4% annual rate, but only 1/4 of the amount needed to be paid by April 15 of the previous year, which is why the penalty is 2.66%.)
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Re: My Understanding of IRS Safe Harbor Rules ...

Post by deanmoriarty » Tue Sep 04, 2018 10:53 pm

grabiner wrote:
Tue Sep 04, 2018 9:22 pm
Spirit Rider wrote:
Tue Sep 04, 2018 9:00 pm
kaneohe wrote:
Tue Sep 04, 2018 8:50 pm
The penalty is based on your shortfall from the safe harbor....so the penalty is graded, not a cliff.
That is contrary to my long held understanding.

I certainly could be wrong, it has happened many times before.

Do you have a substantial authority reference?
IRS Form 2210 (currently the 2017 edition)

Line 5 is 90% of this year's tax. Line 8 is 100% or 110% of last year's tax. Line 9 is the lesser of these two, which is the amount you need to pay.

In the simplest case, Part III of the form determines the penalty. The underpayment on Line 14 is the difference between what you actually paid and the amount on Line 9 (copied to Line 10). The penalty in 2017 is 2.66% of the underpayment if you made your tax payment on April 15 when due, or less if you paid early. (It was a 4% annual rate, but only 1/4 of the amount needed to be paid by April 15 of the previous year, which is why the penalty is 2.66%.)
Could you please explain what you mean by your last sentence in parenthesis?

From my (very basic) understanding, the 2.66% amount is obtained via a formula similar to this, assuming the tax payment happens on April 15 2019, with an interest rate of 4% (even though this year it's partially 5%):

- From April 15 2018 (Q1 deadline) to April 15 2019: 1/4 was owed and remained unpaid 12 months, so 4% is applied on the 1/4 owed
- From June 15 2018 (Q2 deadline) to April 15 2019: 1/4 was owed and remained unpaid 10 months, so 3.33% is applied on the 1/4 owed
- From September 15 2018 (Q3 deadline) to April 15 2019: 1/4 was owed and remained unpaid 7 months, so 2.33% is applied on the 1/4 owed
- From January 15 2019 (Q4 deadline) to April 15 2019: 1/4 was owed and remained unpaid 3 months, so 1% is applied on the 1/4 owed

Total interest paid: (4% + 3.33% + 2.33% + 1%) / 4 = 2.66%

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by grabiner » Tue Sep 04, 2018 11:07 pm

deanmoriarty wrote:
Tue Sep 04, 2018 10:53 pm
grabiner wrote:
Tue Sep 04, 2018 9:22 pm
Spirit Rider wrote:
Tue Sep 04, 2018 9:00 pm
kaneohe wrote:
Tue Sep 04, 2018 8:50 pm
The penalty is based on your shortfall from the safe harbor....so the penalty is graded, not a cliff.
That is contrary to my long held understanding.

I certainly could be wrong, it has happened many times before.

Do you have a substantial authority reference?
IRS Form 2210 (currently the 2017 edition)

Line 5 is 90% of this year's tax. Line 8 is 100% or 110% of last year's tax. Line 9 is the lesser of these two, which is the amount you need to pay.

In the simplest case, Part III of the form determines the penalty. The underpayment on Line 14 is the difference between what you actually paid and the amount on Line 9 (copied to Line 10). The penalty in 2017 is 2.66% of the underpayment if you made your tax payment on April 15 when due, or less if you paid early. (It was a 4% annual rate, but only 1/4 of the amount needed to be paid by April 15 of the previous year, which is why the penalty is 2.66%.)
Could you please explain what you mean by your last sentence in parenthesis?

From my (very basic) understanding, the 2.66% amount is obtained via a formula similar to this, assuming the tax payment happens on April 15 2019, with an interest rate of 4% (even though this year it's partially 5%):

- From April 15 2018 (Q1 deadline) to April 15 2019: 1/4 was owed and remained unpaid 12 months, so 4% is applied on the 1/4 owed
- From June 15 2018 (Q2 deadline) to April 15 2019: 1/4 was owed and remained unpaid 10 months, so 3.33% is applied on the 1/4 owed
- From September 15 2018 (Q3 deadline) to April 15 2019: 1/4 was owed and remained unpaid 7 months, so 2.33% is applied on the 1/4 owed
- From January 15 2019 (Q4 deadline) to April 15 2019: 1/4 was owed and remained unpaid 3 months, so 1% is applied on the 1/4 owed

Total interest paid: (4% + 3.33% + 2.33% + 1%) / 4 = 2.66%
Your math is correct. The 4% annual rate is applied for a full year to 1/4 of the money, and for periods less than one year to the other 3/4, which is where the 2.66% comes from.
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Re: My Understanding of IRS Safe Harbor Rules ...

Post by One Ping » Tue Sep 04, 2018 11:35 pm

Spirit Rider wrote:
Tue Sep 04, 2018 4:40 pm
Also, I wouldn't cut it too close. I might do $22,000 just to be safe.

You also, need to read the Form 1040 Instructions. It is not just Line 63. There are some less common adjustments that you don't want to bite you.
The safety margin is in the estimated AGI, but your point is noted. Also, don't have any of the less common adjustments, so line 63 works for me.
UpperNwGuy wrote:
Tue Sep 04, 2018 6:28 pm
If you know now that you're going to owe $33,000, why not pay at least $30,000 before the end of the year and get that behind you?
Working a 2018 cash flow issue ...
kaneohe wrote:
Tue Sep 04, 2018 9:21 pm
https://www.irs.gov/pub/irs-pdf/f2210.pdf

This is the form you use to calculate penalty.
kaneohe, thanks for the reference. For the case in the OP, the line numbers in Part 1 pf the referenced form 2210 are:

Line 1 $33,000 (2018 tax owed)
Line 2 $0 (other taxes)
Line 3 $0 (refundable credits)
Line 4 $33,000 (sum of lines 1 through 3)
Line 5 $29,700 (90% of line 4)
Line 6 $21,000 (tax withheld, excludes estimated tax payments)
Line 7 $12,000 (line 4 - line 6)
Line 8 $20,900 (max req'd annual payment based on instructions)
Line 9 $20,900 (smaller of line 5 and line 8)
Line 9 No (line 9 > line 6) Don't owe penalty!
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Re: My Understanding of IRS Safe Harbor Rules ...

Post by kaneohe » Wed Sep 05, 2018 9:03 am

One Ping wrote:
Tue Sep 04, 2018 11:35 pm
Spirit Rider wrote:
Tue Sep 04, 2018 4:40 pm
....................... For the case in the OP, the line numbers in Part 1 pf the referenced form 2210 are:

Line 1 $33,000 (2018 tax owed)
Line 2 $0 (other taxes)
Line 3 $0 (refundable credits)
Line 4 $33,000 (sum of lines 1 through 3)
Line 5 $29,700 (90% of line 4)
Line 6 $21,000 (tax withheld, excludes estimated tax payments)
Line 7 $12,000 (line 4 - line 6)
Line 8 $20,900 (max req'd annual payment based on instructions)
Line 9 $20,900 (smaller of line 5 and line 8)
Line 9 No (line 9 > line 6) Don't owe penalty!
Looks like you are safe.........perhaps safer than you think. You used the 110% factor based on last yr taxes.
AFAICT (made that up) you never told what 2017 AGI was and whether you can use the 100% factor. You never
said filing status either. Based the few data pts given, guessing filing status single, 2017 AGI < 150K,and that you could use the 100% factor for safe harbor.

reason for the nagging............not uncommon to misunderstand what the previous yr safe harbor means
It is as you stated in your OP:
Your adjusted gross income is <$150,000 and you've paid in at least 100% of your 2017 tax, or
Your adjusted gross income is >$150,000 and you've paid in at least 110% of your 2017 tax.

The misunderstanding comes from thinking that 150K AGI threshold is based on current yr income. It is not.
It is based on previous yr income. Hence the question.........2017 AGI = ????

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by One Ping » Wed Sep 05, 2018 11:07 am

kaneohe wrote:
Wed Sep 05, 2018 9:03 am
One Ping wrote:
Tue Sep 04, 2018 11:35 pm
For the case in the OP, the line numbers in Part 1 pf the referenced form 2210 are:

Line 1 $33,000 (2018 tax owed)
Line 2 $0 (other taxes)
Line 3 $0 (refundable credits)
Line 4 $33,000 (sum of lines 1 through 3)
Line 5 $29,700 (90% of line 4)
Line 6 $21,000 (tax withheld, excludes estimated tax payments)
Line 7 $12,000 (line 4 - line 6)
Line 8 $20,900 (max req'd annual payment based on instructions)
Line 9 $20,900 (smaller of line 5 and line 8)
Line 9 No (line 9 > line 6) Don't owe penalty!
Looks like you are safe.........perhaps safer than you think. You used the 110% factor based on last yr taxes.
AFAICT (made that up) you never told what 2017 AGI was and whether you can use the 100% factor. You never
said filing status either. Based the few data pts given, guessing filing status single, 2017 AGI < 150K,and that you could use the 100% factor for safe harbor.

reason for the nagging............not uncommon to misunderstand what the previous yr safe harbor means
It is as you stated in your OP:
Your adjusted gross income is <$150,000 and you've paid in at least 100% of your 2017 tax, or
Your adjusted gross income is >$150,000 and you've paid in at least 110% of your 2017 tax.

The misunderstanding comes from thinking that 150K AGI threshold is based on current yr income. It is not.
It is based on previous yr income. Hence the question.........2017 AGI = ????
You are right about my confusion in which year the AGI pertains to. Now that I look at it again, I see that it does apply to the 2017 tax return AGI. Thanks for the nag! :beer

To answer your questions:

2017 & 2018 Filing Status: MFJ
2017 AGI: $160,000

My reading is that the 110% still applies and the form 2210 entries shown above are still correct, right?

As an aside, in reading the instructions, while I see a separate distinction made for MFS I don't see a distinction made between MFJ and single! Maybe i missed it (again!).
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Re: My Understanding of IRS Safe Harbor Rules ...

Post by HueyLD » Wed Sep 05, 2018 11:13 am

You didn't see any mention of "single" because that's one of the infamous "marriage penalty" tax issues.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by kaneohe » Wed Sep 05, 2018 11:48 am

One Ping wrote:
Wed Sep 05, 2018 11:07 am
..........................................

To answer your questions:

2017 & 2018 Filing Status: MFJ
2017 AGI: $160,000

My reading is that the 110% still applies and the form 2210 entries shown above are still correct, right?

As an aside, in reading the instructions, while I see a separate distinction made for MFS I don't see a distinction made between MFJ and single! Maybe i missed it (again!).
Yes, agree w/ your 2210 conclusions. Maybe I'm the missing person now........I didn't see any distinctions for filing status in determining estimated tax penalties/safe harbors. Only thing I saw was farmers/fishermen Where did you
see something about MFS.............the only thing I saw was that if you switch status from yr to yr, then you had to figure out how the MFJ safe harbor translated to a MFS safe harbor.....in terms of how much tax you paid last yr..Other than that,I'm not aware of any difference due to filing status.

Thanks for the 2017 AGI..........I made those incorrect assumptions because I couldn't figure out how you got such a high expected 2018 tax unless you were filing single. Perhaps you were using a 2017 tax calculator for 2018? I like this one
https://www.mortgagecalculator.org/calc ... ulator.php and I got 28K for MFJ even if all income was ordinary income . You said 33K tax for 190K AGI.

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by One Ping » Wed Sep 05, 2018 11:56 am

kaneohe wrote:
Wed Sep 05, 2018 11:48 am
One Ping wrote:
Wed Sep 05, 2018 11:07 am
..........................................

To answer your questions:

2017 & 2018 Filing Status: MFJ
2017 AGI: $160,000

My reading is that the 110% still applies and the form 2210 entries shown above are still correct, right?

As an aside, in reading the instructions, while I see a separate distinction made for MFS I don't see a distinction made between MFJ and single! Maybe i missed it (again!).
Yes, agree w/ your 2210 conclusions. Maybe I'm the missing person now........I didn't see any distinctions for filing status in determining estimated tax penalties/safe harbors. Only thing I saw was farmers/fishermen Where did you
see something about MFS.............the only thing I saw was that if you switch status from yr to yr, then you had to figure out how the MFJ safe harbor translated to a MFS safe harbor.....in terms of how much tax you paid last yr..Other than that,I'm not aware of any difference due to filing status.

Thanks for the 2017 AGI..........I made those incorrect assumptions because I couldn't figure out how you got such a high expected 2018 tax unless you were filing single. Perhaps you were using a 2017 tax calculator for 2018? I like this one
https://www.mortgagecalculator.org/calc ... ulator.php and I got 28K for MFJ even if all income was ordinary income . You said 33K tax for 190K AGI.
Got me again! $190K taxable, $215K AGI. From the instructions you referenced earlier:
IRS Form 2210 Line 8 Instructions wrote: Enter the 2016 tax you figured above unless the AGI on your 2016 return is more than $150,000 ($75,000 if married filing separately for 2017). If the AGI shown on your 2016 tax return is more than $150,000 ($75,000 if married filing separately), enter 110% of the amount of the tax computed earlier.
Maybe I misunderstood this too ... :?
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Re: My Understanding of IRS Safe Harbor Rules ...

Post by kaneohe » Wed Sep 05, 2018 12:59 pm

One Ping wrote:
Wed Sep 05, 2018 11:56 am
.................................. From the instructions you referenced earlier:
IRS Form 2210 Line 8 Instructions wrote: Enter the 2016 tax you figured above unless the AGI on your 2016 return is more than $150,000 ($75,000 if married filing separately for 2017). If the AGI shown on your 2016 tax return is more than $150,000 ($75,000 if married filing separately), enter 110% of the amount of the tax computed earlier.
Maybe I misunderstood this too ... :?
Good find! shows you when you read the instructions on the form and they say see instructions (in the instructions)
it pays to follow their orders...............sounds like a complement to what I saw that if you switch filing status yr. to yr. you have to adjust for that......so for married, you take the 150K threshold and give each person half of it and also
"half" the income............as huey said, marriage penalty in action compared to single.

I'd better quit before you catch up :happy

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Re: My Understanding of IRS Safe Harbor Rules ...

Post by One Ping » Wed Sep 05, 2018 2:15 pm

kaneohe wrote:
Wed Sep 05, 2018 12:59 pm
I'd better quit before you catch up :happy
Hey, no problem. We all help keep each other honest. :sharebeer
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