Do I Understand Safe Harbor rules correctly?

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CoastalWinds
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Do I Understand Safe Harbor rules correctly?

Post by CoastalWinds » Fri Nov 08, 2019 9:12 pm

This year, mine and DHs joint income jumped quite a bit, and a large-but-difficult-to-estimate year-end bonus adds some uncertainty from a tax planning /withholding perspective.

I understand there are ‘safe harbor rules’ that might help us in this situation? As long as we pay 110% of the total tax that we owed last year, is this sufficient to avoid any issue with underpayment penalties? (note that we’ve been properly withheld YTD; it’s the bonus that might throw us off).

If we pay more than 110% than last years tax but end up being more than $1K underpaid this year when we go to file our return, is there a penalty for that? Stated alternately, do we need to make an estimated tax payment sooner than the April 2020 filing deadline to get it within $1K of the amount due?

rkhusky
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Re: Do I Understand Safe Harbor rules correctly?

Post by rkhusky » Fri Nov 08, 2019 9:25 pm

110% of last years taxes will do it. So will within $1000 of tax owed. Just need one, not both.

However, the tax needs to be either through withholding or evenly spread through the year (e.g. you can't make an estimated payment of 110% on 12/31).
Last edited by rkhusky on Fri Nov 08, 2019 9:28 pm, edited 2 times in total.

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MP123
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Re: Do I Understand Safe Harbor rules correctly?

Post by MP123 » Fri Nov 08, 2019 9:26 pm

Yes, your understanding is correct assuming that your income is over $150k MFJ. If it's less than that then 100% of last years taxes will do.

BuddyJet
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Re: Do I Understand Safe Harbor rules correctly?

Post by BuddyJet » Fri Nov 08, 2019 9:27 pm

I'm not an accountant but that's my understanding also. Assuming that the tax payments are made through withholding. If paid through estimated payments, timing issues could be involved
People say nothing is impossible. I do nothing all day.

prd1982
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Re: Do I Understand Safe Harbor rules correctly?

Post by prd1982 » Fri Nov 08, 2019 9:33 pm

CoastalWinds wrote:
Fri Nov 08, 2019 9:12 pm
As long as we pay 110% of the total tax that we owed last year, is this sufficient to avoid any issue with underpayment penalties?
Unfortunately, NO. For high earners you must have 110% of the total tax bill you owed last year withheld from you pay checks. So estimated tax payments do not count. The exception is if you make 4 equal estimated payments on time. From your question, I assume you have not been making estimated payments this year.

What I would suggest doing:

a. Use a 2018 tax program, assuming you have one, to estimate what you will owe for 2019.

b. Make an estimated payment so your withholding + estimated taxes is >= what you owe for 2019.

c. You will need to fill out form 2110 as part of your 2019 taxes. It will break your income, deductions, and tax payments into quarters. For each quarter where you have not paid the fair share of taxes, you will be assessed a penalty + interest.

You could take the default for interest + penalties. But since you are going to have a large income in the 4th quarter, it will likely be worth the effort to fill out the 2110.

Lee_WSP
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Re: Do I Understand Safe Harbor rules correctly?

Post by Lee_WSP » Fri Nov 08, 2019 11:37 pm

prd1982 wrote:
Fri Nov 08, 2019 9:33 pm
CoastalWinds wrote:
Fri Nov 08, 2019 9:12 pm
As long as we pay 110% of the total tax that we owed last year, is this sufficient to avoid any issue with underpayment penalties?
Unfortunately, NO. For high earners you must have 110% of the total tax bill you owed last year withheld from you pay checks. So estimated tax payments do not count. The exception is if you make 4 equal estimated payments on time. From your question, I assume you have not been making estimated payments this year.

What I would suggest doing:

a. Use a 2018 tax program, assuming you have one, to estimate what you will owe for 2019.

b. Make an estimated payment so your withholding + estimated taxes is >= what you owe for 2019.

c. You will need to fill out form 2110 as part of your 2019 taxes. It will break your income, deductions, and tax payments into quarters. For each quarter where you have not paid the fair share of taxes, you will be assessed a penalty + interest.

You could take the default for interest + penalties. But since you are going to have a large income in the 4th quarter, it will likely be worth the effort to fill out the 2110.
This is the most complete answer so far.

smitcat
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Re: Do I Understand Safe Harbor rules correctly?

Post by smitcat » Sat Nov 09, 2019 7:00 am

prd1982 wrote:
Fri Nov 08, 2019 9:33 pm
CoastalWinds wrote:
Fri Nov 08, 2019 9:12 pm
As long as we pay 110% of the total tax that we owed last year, is this sufficient to avoid any issue with underpayment penalties?
Unfortunately, NO. For high earners you must have 110% of the total tax bill you owed last year withheld from you pay checks. So estimated tax payments do not count. The exception is if you make 4 equal estimated payments on time. From your question, I assume you have not been making estimated payments this year.

What I would suggest doing:

a. Use a 2018 tax program, assuming you have one, to estimate what you will owe for 2019.

b. Make an estimated payment so your withholding + estimated taxes is >= what you owe for 2019.

c. You will need to fill out form 2110 as part of your 2019 taxes. It will break your income, deductions, and tax payments into quarters. For each quarter where you have not paid the fair share of taxes, you will be assessed a penalty + interest.

You could take the default for interest + penalties. But since you are going to have a large income in the 4th quarter, it will likely be worth the effort to fill out the 2110.
Please note this in the first post...
"(note that we’ve been properly withheld YTD; it’s the bonus that might throw us off)."
The OP and his wife are not behind in taxes yet and are concerned about the future. He does not yet know what this bonus may pay out nor has he received any bonus at this time.

prd1982
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Re: Do I Understand Safe Harbor rules correctly?

Post by prd1982 » Sat Nov 09, 2019 8:05 am

smitcat wrote:
Sat Nov 09, 2019 7:00 am

Please note this in the first post...
"(note that we’ve been properly withheld YTD; it’s the bonus that might throw us off)."
The OP and his wife are not behind in taxes yet and are concerned about the future. He does not yet know what this bonus may pay out nor has he received any bonus at this time.
Understood. However, I thought my comments indicated that withholding 110% was enough. As for the bonus, the 4th quarter payment isn't due until Jan 15, 2020. So the OP will know the bonus amt in time to estimate taxes.

Two additional items:

1. You might be able to submit a W4 to have additional withholding to meet the 110% rule, if not already met. But lots of companies will not be able to process the W4 in time for Dec.

2. Don't forget about state taxes. They usually have estimated payment rules too. Some follow the Fed rules, but I gather that others (e.g., CA) are more stringent.

Lee_WSP
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Re: Do I Understand Safe Harbor rules correctly?

Post by Lee_WSP » Sat Nov 09, 2019 8:37 am

Why isn't company withholding from the bonus? It is not 1099 income and all applicable withholding would apply along with FICA taxes.

retiredjg
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Re: Do I Understand Safe Harbor rules correctly?

Post by retiredjg » Sat Nov 09, 2019 8:54 am

Lee_WSP wrote:
Sat Nov 09, 2019 8:37 am
Why isn't company withholding from the bonus? It is not 1099 income and all applicable withholding would apply along with FICA taxes.
This was my question as well.

fourwheelcycle
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Re: Do I Understand Safe Harbor rules correctly?

Post by fourwheelcycle » Sat Nov 09, 2019 8:58 am

prd1982 wrote:
Fri Nov 08, 2019 9:33 pm
For high earners you must have 110% of the total tax bill you owed last year withheld from your pay checks. ..... The exception is if you make 4 equal estimated payments on time.
For 2019, TurboTax says "If your prior year's Adjusted Gross Income was greater than $150,000, then you must pay [by withholding or timely estimated tax payments] either 90 percent of this year's income tax liability or 110 percent of last year's income tax liability."

Is TurboTax correct? Does the 90% provision apply to incomes over $150K?

Lee_WSP
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Re: Do I Understand Safe Harbor rules correctly?

Post by Lee_WSP » Sat Nov 09, 2019 9:05 am

retiredjg wrote:
Sat Nov 09, 2019 8:54 am
Lee_WSP wrote:
Sat Nov 09, 2019 8:37 am
Why isn't company withholding from the bonus? It is not 1099 income and all applicable withholding would apply along with FICA taxes.
This was my question as well.
OP hasn't posted again to clarify the issues. My guess is that she's worrying for nothing and the bonus will be withheld like husband's normal wages. She just doesn't realize that bonuses are withheld and treated as normal income on a W-2. Heck, I didn't know that until I started processing W-2's.

FactualFran
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Re: Do I Understand Safe Harbor rules correctly?

Post by FactualFran » Sat Nov 09, 2019 12:16 pm

The wording in the instructions for Form 2210 includes: in general, you may owe the penalty if the total of your withholding and timely estimated tax payments didn't equal at least. If for the current year you have a total of 100%, 110% for high income taxpayers, of the income tax for the previous year withheld, you meet the safe harbor. If some of the total includes estimated income tax payments, those payments need to have been made in a timely manner, with a sufficient amount paid by the due date of each quarter.

FactualFran
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Re: Do I Understand Safe Harbor rules correctly?

Post by FactualFran » Sat Nov 09, 2019 2:36 pm

fourwheelcycle wrote:
Sat Nov 09, 2019 8:58 am
Is TurboTax correct? Does the 90% provision apply to incomes over $150K?
Yes, Turbo Tax is correct. Regardless of income, underpayment penalties are not charged if one pays 90% of the tax for a year by withholding plus, if estimate payments were made, timely estimated payments.

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Artsdoctor
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Re: Do I Understand Safe Harbor rules correctly?

Post by Artsdoctor » Sat Nov 09, 2019 3:29 pm

fourwheelcycle wrote:
Sat Nov 09, 2019 8:58 am
prd1982 wrote:
Fri Nov 08, 2019 9:33 pm
For high earners you must have 110% of the total tax bill you owed last year withheld from your pay checks. ..... The exception is if you make 4 equal estimated payments on time.
For 2019, TurboTax says "If your prior year's Adjusted Gross Income was greater than $150,000, then you must pay [by withholding or timely estimated tax payments] either 90 percent of this year's income tax liability or 110 percent of last year's income tax liability."

Is TurboTax correct? Does the 90% provision apply to incomes over $150K?
Yes, it's the 110% versus 90% safe harbor rule. If you're income is increasing each year, the 110% safe harbor rule is incredibly simple to institute. However, if your income is decreasing each year, it really takes some planning to hit the 90% safe harbor. I've seen family and friends get a mid-to-late December bonus which throws a monkey wrench into planning so make sure that there's no pending bonus out there at the end of the year.

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whodidntante
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Re: Do I Understand Safe Harbor rules correctly?

Post by whodidntante » Sat Nov 09, 2019 3:37 pm

prd1982 wrote:
Fri Nov 08, 2019 9:33 pm
CoastalWinds wrote:
Fri Nov 08, 2019 9:12 pm
As long as we pay 110% of the total tax that we owed last year, is this sufficient to avoid any issue with underpayment penalties?
Unfortunately, NO. For high earners you must have 110% of the total tax bill you owed last year withheld from you pay checks. So estimated tax payments do not count. The exception is if you make 4 equal estimated payments on time. From your question, I assume you have not been making estimated payments this year.

What I would suggest doing:

a. Use a 2018 tax program, assuming you have one, to estimate what you will owe for 2019.

b. Make an estimated payment so your withholding + estimated taxes is >= what you owe for 2019.

c. You will need to fill out form 2110 as part of your 2019 taxes. It will break your income, deductions, and tax payments into quarters. For each quarter where you have not paid the fair share of taxes, you will be assessed a penalty + interest.

You could take the default for interest + penalties. But since you are going to have a large income in the 4th quarter, it will likely be worth the effort to fill out the 2110.
It's probably simplest to pay equal quarterly estimated tax, but there is nothing magical about that. E.g., one could pay 5k, 5k, 5k, 7k without poking the bear, but 20k had better be enough to meet a safe harbor to keep things simple. Sometimes I overpay my estimated taxes to meet a credit card sign up bonus, or I sell stock to meet expenses and have to pay the tax in a certain quarter.

Lalamimi
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Re: Do I Understand Safe Harbor rules correctly?

Post by Lalamimi » Sat Nov 09, 2019 4:32 pm

Just a possible suggestion. If the bonus is being paid through payroll, can you increase your Tax withholding through HR for rest of year? My annual performance bonuses ( 6 months salary) always had the higher bracket tax amount withheld).

Traveler
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Re: Do I Understand Safe Harbor rules correctly?

Post by Traveler » Sat Nov 09, 2019 5:25 pm

retiredjg wrote:
Sat Nov 09, 2019 8:54 am
Lee_WSP wrote:
Sat Nov 09, 2019 8:37 am
Why isn't company withholding from the bonus? It is not 1099 income and all applicable withholding would apply along with FICA taxes.
This was my question as well.
My bonus earlier this year was taxed at 22%, lower than my marginal rate. From a quick google search, for what it's worth, it seems that bonuses under $1M are taxed at 22%. So for some this may be more than enough and for others, like me, it is not enough.

delamer
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Re: Do I Understand Safe Harbor rules correctly?

Post by delamer » Sat Nov 09, 2019 7:03 pm

Traveler wrote:
Sat Nov 09, 2019 5:25 pm
retiredjg wrote:
Sat Nov 09, 2019 8:54 am
Lee_WSP wrote:
Sat Nov 09, 2019 8:37 am
Why isn't company withholding from the bonus? It is not 1099 income and all applicable withholding would apply along with FICA taxes.
This was my question as well.
My bonus earlier this year was taxed at 22%, lower than my marginal rate. From a quick google search, for what it's worth, it seems that bonuses under $1M are taxed at 22%. So for some this may be more than enough and for others, like me, it is not enough.
Yup, same for us.

And the bonus is paid in December so there is only one regular paycheck left in the year. Which means no opportunity to adjust withholding.

Spirit Rider
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Re: Do I Understand Safe Harbor rules correctly?

Post by Spirit Rider » Sun Nov 10, 2019 10:50 am

The OP has two options in order to avoid any penalty:
  • Withhold >= 110% of last year's tax liability and pay 100% of this years tax liability by 4/15. No penalty will be due.
  • Withhold >= 90% of the income and prorated adjustments to income, deductions and credits thru 8/31*. If necessary make a fourth quarter estimated tax payment by 1/15/20 that will bring withholding + estimated tax payments to 90% of current year's tax liability. File Form 2210 on the 2019 tax return and pay 100% of this years tax liability by 4/15. No penalty will be due.
*This will almost certainly be true.

MarkNYC
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Re: Do I Understand Safe Harbor rules correctly?

Post by MarkNYC » Sun Nov 10, 2019 6:07 pm

prd1982 wrote:
Fri Nov 08, 2019 9:33 pm
What I would suggest doing:

a. Use a 2018 tax program, assuming you have one, to estimate what you will owe for 2019.

b. Make an estimated payment so your withholding + estimated taxes is >= what you owe for 2019.

c. You will need to fill out form 2110 as part of your 2019 taxes. It will break your income, deductions, and tax payments into quarters. For each quarter where you have not paid the fair share of taxes, you will be assessed a penalty + interest.

You could take the default for interest + penalties. But since you are going to have a large income in the 4th quarter, it will likely be worth the effort to fill out the 2110.
Regarding item "b" above: the OP indicated 2019 tax is expected to be much higher than 2018 tax. Let's say 2018 tax was $50K and 2019 tax is expected to be $120K. All that's needed to avoid (or minimize) an underpayment penalty is for withholding and/or estimated tax payments to equal $55K, so that the remaining $65k can be paid 4/15/20. There is no need to pay 2019 withholding and estimated payments that total $120K.

An underpayment of tax will result in the IRS assessing a "penalty" which is calculated in the form of interest. An underpayment will not result in the assessment of a penalty PLUS interest.

Note: the applicable IRS Form is 2210, not 2110.

MarkNYC
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Re: Do I Understand Safe Harbor rules correctly?

Post by MarkNYC » Sun Nov 10, 2019 6:17 pm

Spirit Rider wrote:
Sun Nov 10, 2019 10:50 am
The OP has two options in order to avoid any penalty:
  • Withhold >= 110% of last year's tax liability and pay 100% of this years tax liability by 4/15. No penalty will be due.
  • Withhold >= 90% of the income and prorated adjustments to income, deductions and credits thru 8/31*. If necessary make a fourth quarter estimated tax payment by 1/15/20 that will bring withholding + estimated tax payments to 90% of current year's tax liability. File Form 2210 on the 2019 tax return and pay 100% of this years tax liability by 4/15. No penalty will be due.
*This will almost certainly be true.
Paying 100% of current year tax by 4/15 of the following year is needed to avoid an interest assessment, and possibly a late-payment penalty, but it is not a requirement for avoiding a current year underpayment penalty.

cherijoh
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Re: Do I Understand Safe Harbor rules correctly?

Post by cherijoh » Sun Nov 10, 2019 6:23 pm

prd1982 wrote:
Fri Nov 08, 2019 9:33 pm
CoastalWinds wrote:
Fri Nov 08, 2019 9:12 pm
As long as we pay 110% of the total tax that we owed last year, is this sufficient to avoid any issue with underpayment penalties?
Unfortunately, NO. For high earners you must have 110% of the total tax bill you owed last year withheld from you pay checks. So estimated tax payments do not count. The exception is if you make 4 equal estimated payments on time. From your question, I assume you have not been making estimated payments this year.

What I would suggest doing:

a. Use a 2018 tax program, assuming you have one, to estimate what you will owe for 2019.

b. Make an estimated payment so your withholding + estimated taxes is >= what you owe for 2019.

c. You will need to fill out form 2110 as part of your 2019 taxes. It will break your income, deductions, and tax payments into quarters. For each quarter where you have not paid the fair share of taxes, you will be assessed a penalty + interest.

You could take the default for interest + penalties. But since you are going to have a large income in the 4th quarter, it will likely be worth the effort to fill out the 2110.
Just as an FYI, the 2019 version of Turbotax is available for downloading now on Amazon. You would definitely need to run the updates before filing your taxes, but you could enter actual known information like property taxes.

GeoMetry
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Re: Do I Understand Safe Harbor rules correctly?

Post by GeoMetry » Mon Nov 11, 2019 4:40 am

If you received a large bonus in January and nothing was withheld for taxes it is still possible to make a "Timely" payment at the end of the year. Assuming you have the cash to cover the amount needed to get to the safe harbor. You can initiate a 60 day rollover from a traditional IRA and instruct them to withhold whatever amount you need to have withheld to hit the safe harbor. Then as soon as you receive the check (some small amount after the massive withholding) from the IRA complete the rollover by redepositing it along with the the cash you would have used to pay your estimated tax. Because the amount was paid via withholding, the payment is considered "timely" by default. Make sure you complete the rollover within 60 days!!! One other caveat; You can only do one 60 day rollover in a 365 day period. Even if you have already done a 60 day rollover in that time frame, your spouse might still be able to do this.

https://financialducksinarow.com/1663/i ... -payments/

jwhitaker
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Re: Do I Understand Safe Harbor rules correctly?

Post by jwhitaker » Mon Nov 11, 2019 1:45 pm

I had a situation similar to this. Withholdings from your paycheck are treated much more simply than estimated tax payments. Any deviation throughout the year triggers the extra complex form. What I did was jack up my withholding with an extra dollar amount on each paycheck which will put me in range of this year's taxes. There are still 3 paychecks remaining this year, if you have e.g. 3 grand extra withheld from each of those will you not be okay? Also, I looked into the actual fines, not that ridiculous, so if you miss it by a few bucks it's not the end of the world. No one is coming to bust down your door and arrest you.

zzyzx
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Re: Do I Understand Safe Harbor rules correctly?

Post by zzyzx » Mon Nov 11, 2019 4:24 pm

delamer wrote:
Sat Nov 09, 2019 7:03 pm
Traveler wrote:
Sat Nov 09, 2019 5:25 pm
retiredjg wrote:
Sat Nov 09, 2019 8:54 am
Lee_WSP wrote:
Sat Nov 09, 2019 8:37 am
Why isn't company withholding from the bonus? It is not 1099 income and all applicable withholding would apply along with FICA taxes.
This was my question as well.
My bonus earlier this year was taxed at 22%, lower than my marginal rate. From a quick google search, for what it's worth, it seems that bonuses under $1M are taxed at 22%. So for some this may be more than enough and for others, like me, it is not enough.
Yup, same for us.

And the bonus is paid in December so there is only one regular paycheck left in the year. Which means no opportunity to adjust withholding.
Ask your payroll department if you can elect your bonus to be withheld at the 37% rate. I have had this option at a few different employers.

exoilman
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Re: Do I Understand Safe Harbor rules correctly?

Post by exoilman » Mon Nov 11, 2019 4:43 pm

I do not pay any tax till Dec. and will have a large tax bill due to RMD's and large annuity cash out. Will the safe harbor apply for us in spite of no taxes taken out?

Thanks
sam

Gill
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Re: Do I Understand Safe Harbor rules correctly?

Post by Gill » Mon Nov 11, 2019 4:51 pm

exoilman wrote:
Mon Nov 11, 2019 4:43 pm
I do not pay any tax till Dec. and will have a large tax bill due to RMD's and large annuity cash out. Will the safe harbor apply for us in spite of no taxes taken out?

Thanks
sam
If you've met the safe harbor rules through withholding you're fine, regardless of the size of your tax bill.
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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