Estimated taxes, safe harbor question

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Topic Author
crit
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Joined: Mon Jan 05, 2015 12:54 pm

Estimated taxes, safe harbor question

Post by crit » Fri Nov 15, 2019 12:48 am

For FY 2018, adjusted gross income was over $150k. Our tax owed was ~4k less than tax paid; we were just within the safe harbor 90% limit.

For FY 2019, we had a Great Taxable Event in July. Our regular income is slightly lower for 2019, and we did not change our withholding %s.
We will not have withheld 110% of last year's tax owed.
We will not have withheld 90% of this year's tax.
Tax will be over $1k.
Thus, we will fail the safe harbor rules.

I'm trying to make sense of what I read around addressing this failure. This event is not even close to cover-able by increasing our paycheck withholdings; that is not (!) a solution. I read that estimated tax payments should be "substantially equal", and I don't have a time machine to go back and start paying more last spring. Most of what I read online boils down to those, and ends there - "just pay equal estimated taxes!". I can't.

So I think I need to make an estimated payment for January, and then fill out Form 2210 on Underpayments.

My question is: do I need to pay the taxes on the Great Taxable Event by January 15?
Or only enough to get us up to having paid 110% of last year's tax due, but it's ok (or explained by 2210) that it's still a lumpy estimate?

I usually TurboTax, in case that is relevant.

Thanks in advance for educating me.

bluebolt
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Re: Estimated taxes, safe harbor question

Post by bluebolt » Fri Nov 15, 2019 1:05 am

Can you change your withholding enough for the last 1 1/2 months of 2019 to hit the 110% of last year's tax owed?

Topic Author
crit
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Re: Estimated taxes, safe harbor question

Post by crit » Fri Nov 15, 2019 1:09 am

I don't think that's possible.

increment
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Re: Estimated taxes, safe harbor question

Post by increment » Fri Nov 15, 2019 2:17 am

If you want to say that you can minimize penalties by paying 110% of the previous year's taxes, then that is fine by Form 2210, but the penalty will consider that you are now late on payments that were due in April, June, and September. I believe that you can reduce the penalty owed (from those late payments) by doing a make-up payment ASAP, rather than waiting for January (or next April), because the amount accrues daily.

boomer_techie
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Re: Estimated taxes, safe harbor question

Post by boomer_techie » Fri Nov 15, 2019 2:40 am

crit wrote:
Fri Nov 15, 2019 12:48 am
For FY 2019, we had a Great Taxable Event in July.

My question is: do I need to pay the taxes on the Great Taxable Event by January 15?
For the event in July, you needed to have made an estimated payment by September 15th, um, September 16th due to "reasons". If you make that payment now, you'll only need to pay a penalty for two months of underpayment. If you wait, the penalty will keep increasing.

Edit: Your September payment, when combined with your January through August withholding, should have reached 110% of 75% of your 2018 tax. Coming up, your January payment, when combined with the entire year's withholding, should reach 110% of 100% of your 2018 tax. (I assume, because of the large income increase, that this threshold is easier to achieve than 90% of 2019 taxes.)

Note, it is possible to have a both a refund and an underpayment penalty in the same tax year. Lumpiness matters - except for withholding.

Estimated payments don't have to be substantially equal, but if not, then you have to fill out form 2210-AnnualizedIncome to prove that total payments through each quarter meet the applicable 90%/100%/110% levels.

Edit 2: Suggestion: Do what you can to catch up to the safe harbor, i.e. set the entire amount of remaining paychecks to be withheld, and/or make payments now and in January. Then, when filing taxes, don't include Form 2210. Without Form 2210-AI, depending on the type of event, the IRS doesn't know when the event happened. If you've made the effort to catch up, the IRS's computers may let the delay slide.

Topic Author
crit
Posts: 493
Joined: Mon Jan 05, 2015 12:54 pm

Re: Estimated taxes, safe harbor question

Post by crit » Fri Nov 15, 2019 1:49 pm

Suggestion: Do what you can to catch up to the safe harbor, i.e. set the entire amount of remaining paychecks to be withheld, and/or make payments now and in January

I think I'm still confused on: will getting the total of an estimated payment in+ any additional witholding add up to 110% of last year's tax due, suffice to get us into the safe harbor (and thus not pay penalties on the Big Event)? Or does the estimated payment need to include the big tax hit on the Big Event?

increment
Posts: 188
Joined: Tue May 15, 2018 2:20 pm

Re: Estimated taxes, safe harbor question

Post by increment » Fri Nov 15, 2019 2:08 pm

crit wrote:
Fri Nov 15, 2019 1:49 pm
will getting the total of an estimated payment in+ any additional withholding add up to 110% of last year's tax due, suffice to get us into the safe harbor (and thus not pay penalties on the Big Event)?
Yes, you can ignore the Event and have the required estimated-tax payments be based on 110% of last year's tax. But then you are now late on April, June, and September's payments. The penalties continue to accrue daily.
Or does the estimated payment need to include the big tax hit on the Big Event?
Alternatively, you can ignore what you owed last year and calculate your required estimated-tax payments based on what you will owe for the current tax year. If that amount is substantially greater than your total 2018 total tax due, it makes no sense to have tried to make equal payments. Therefore, you have to go by the tax attributable to each of the four quarter-like periods. In that case, by mid-September you should have paid most of the big tax hit from your July transaction. You are now late on that, and the penalties continue to accrue daily.

In case it's not obvious, there is nothing wrong with making unequal estimated-tax payments. (The government will accept your money whenever you offer it.) They will just affect the penalty you may or may not have to pay. Usually it is easiest to calculate and understand if the payments are equal, but that is not always feasible.

Topic Author
crit
Posts: 493
Joined: Mon Jan 05, 2015 12:54 pm

Re: Estimated taxes, safe harbor question

Post by crit » Fri Nov 15, 2019 2:22 pm

The penalties on the missing estimated taxes are much smaller than the penalty on the Big Event, so that is what I'll aim at, I think.

lstone19
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Re: Estimated taxes, safe harbor question

Post by lstone19 » Fri Nov 15, 2019 3:49 pm

boomer_techie wrote:
Fri Nov 15, 2019 2:40 am
Estimated payments don't have to be substantially equal, but if not, then you have to fill out form 2210-AnnualizedIncome to prove that total payments through each quarter meet the applicable 90%/100%/110% levels.
Annualized Income and unequal estimated payments are two separate things. Unequal estimated payments can be handled on Form 2210 without the Annualized Income schedule. The Annualized Income schedule adjusts what was due each quarter and is independent of how those payments were made.

That said, since the OP said this "Great Taxable Event" occurred in July, the OP will probably benefit by completing the Annualized Income schedule. By doing so, the amount of tax due through withholding and estimated payments for the 1st and 2nd quarters will be less and therefore the penalty will be less (but it may increase the amount due for the 3rd quarter - the OP would need to figure it both ways to see which results in the lower penalty.

Annualized Income, in a nutshell, assumes that what you earned in the 1st quarter is 1/4 of what you earned for the year for purposes of determining how much tax needed to be paid by April 15. Likewise, for the "2nd quarter" (which is actually just April and May), it assumes that what you earned for those first five months is 5/12 of what you earned for the year.

As for unequal estimated payments, Form 2210 handles it just fine as any excess or shortfall in one quarter just carries over to the next quarter. If you don't do the annualized income schedule, 2210 assumes 25% of the year's tax was due each quarter. But if your estimated payment for 1st quarter is $1,000 over what was needed, then that's $1,000 head start on the 2nd quarter. And so forth.

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