Estimated Tax Payment Question

[Carno]

Let's say I must pay at least 100% of my 2022 tax liability of $12,000 as estimated tax for 2023. Also, let's say I applied $2,000 from my 2022 tax return to 2023 estimated tax. My question is am I required to make 4 equal quarterly payments of $3,000 (12,000/4=3,000) OR am I required to make a lesser 4 equal quarterly payments of $2,500 because I can deduct that $2,000 from $12,000 (12,000-2,000)/4=2,500?

[chassis]

Let's say I must pay at least 100% of my 2022 tax liability of $12,000 as estimated tax for 2023. Also, let's say I applied $2,000 from my 2022 tax return to 2023 estimated tax. My question is am I required to make 4 equal quarterly payments of $4,000 (12,000/4=4,000) OR am I required to make a lesser 4 equal quarterly payments of $2,500 because I can deduct that $4,000 from $12,000 (12,000-2,000)/4=2,500?

I am not a tax professional. I have first hand experience over considerable time with estimated tax payments.

It all comes out in the wash when you file your return. The IRS site says to pay estimated taxes on a quarterly basis. I do this. If you have paid more in a quarter than you believe and can substantiate that you owed, it would be your choice to account for the overpayment in the next quarterly payment. Vague answer but you or your tax advisor need to make the decision. Follow the rules as written is the starting point.

What do you mean by “applied”?

[dlw322]

The amount applied from your 2022 tax return counts towards the first quarter estimate. The following is from IRS publication 505 (font changes are mine): "If you show an overpayment of tax after completing your Form 1040 or 1040-SR for 2022, you can apply part or all of it to your estimated tax for 2023. On Form 1040 or 1040-SR, enter the amount you want credited to your estimated tax rather than refunded. Take the amount you have credited into account when figuring your estimated tax payments. If you timely file your 2022 return, treat the credit as a payment made on April 18, 2023"

So you would make a $1,000 payment in the first quarter(plus the $2,000 from the refund amount applied). Then follow that up with three $3,000 payments in the other three quarters.

[Carno]

Let's say I must pay at least 100% of my 2022 tax liability of $12,000 as estimated tax for 2023. Also, let's say I applied $2,000 from my 2022 tax return to 2023 estimated tax. My question is am I required to make 4 equal quarterly payments of $4,000 (12,000/4=4,000) OR am I required to make a lesser 4 equal quarterly payments of $2,500 because I can deduct that $4,000 from $12,000 (12,000-2,000)/4=2,500?

I am not a tax professional. I have first hand experience over considerable time with estimated tax payments.

It all comes out in the wash when you file your return. The IRS site says to pay estimated taxes on a quarterly basis. I do this. If you have paid more in a quarter than you believe and can substantiate that you owed, it would be your choice to account for the overpayment in the next quarterly payment. Vague answer but you or your tax advisor need to make the decision. Follow the rules as written is the starting point.

What do you mean by “applied”?

I revised (corrected) the numbers in my original post (edited my original post). There is an option in form 1040 where you can apply an amount you are owned to the following year estimated tax instead of asking for a refund check or direct deposit.

[FiveK]

Let's say I must pay at least 100% of my 2022 tax liability of $12,000 as estimated tax for 2023....

If you aren't doing any withholding, Part III of Form 2210 is what you can (and the IRS will) use to see if any under-withholding penalty will be due.

Because you get credit for the $2K in the first quarter, paying an additional $2500 for each quarter will suffice. If you can build a spreadsheet, the Form 2210 Part III calculations are straightforward.

If you missed the additional first quarter estimated payment, and have to catch up in quarters 2-4, you'll have a slight underpayment penalty, probably less than $20 if my mental math is correct.

[hachiko]

Paying $1k in Q1 and $3k on each of the next three quarterly due dates (note, the dates aren't 3 months apart), will avoid the penalty.

Other methods which front-load your payments even more, for example, paying $2,500 on each of the 4 quarterly due dates, will also result in no penalty, though it's not the "most optimal" use of your cash.

[erp]

If you are in CA, for most residents, est tax payment deadlines are postponed until Oct, so you may not even need to be paying right now.

[Carno]

Paying $1k in Q1 and $3k on each of the next three quarterly due dates (note, the dates aren't 3 months apart), will avoid the penalty.

Other methods which front-load your payments even more, for example, paying $2,500 on each of the 4 quarterly due dates, will also result in no penalty, though it's not the "most optimal" use of your cash.

Thanks. Now if I had applied $6,000 then does this mean I don't pay anything ($0), or skip the payments, for the first and second quarter and then start paying only $3,000 or (12000-6000)/2 for the last 2 quarters?

[FiveK]

Thanks. Now if I had applied $6,000 then does this mean I don't pay anything ($0), or skip the payments, for the first and second quarter and then start paying only $3,000 or (12000-6000)/2 for the last 2 quarters?

What do you get if you fill in Part III of Form 2210?

[Carno]

Thanks. Now if I had applied $6,000 then does this mean I don't pay anything ($0), or skip the payments, for the first and second quarter and then start paying only $3,000 or (12000-6000)/2 for the last 2 quarters?

What do you get if you fill in Part III of Form 2210?

Thanks, I just downloaded Form 2210 and am working on it.

[lstone19]

Thanks, I just downloaded Form 2210 and am working on it.

A lot of misconception about estimated taxes would go away if people would download a 2210 and work through the penalty calculation portion (Part III). A big misconception is that equal payments (part of your original question) are required. They're not. Estimated taxes are accounted for on Part III and as you work through it, nothing asks did you make equal payments. Whether or not you did will make no difference to the penalty calculation. And as you'll see as you work through it, any amount in excess of the minimum you needed to pay in a quarter just carries over to the next quarter. So if mid-year, you realize that you're paying more than you need to, you can just reduce the next quarter's payment. If the penalty calculation comes out to $0 penalty, the IRS will not care if you made equal payments or not (they won't care even if there is a penalty). As near as I can figure, they say you should make equal payments because that's just a way to say timely payments are expected and you can't just wait to pay on 4/15 (and probably because they figure the average taxpayer does not have the ability to figure out mid-year if their tax situation has changed or not).

[FiveK]

As near as I can figure, they say you should make equal payments because that's just a way to say timely payments are expected and you can't just wait to pay on 4/15 (and probably because they figure the average taxpayer does not have the ability to figure out mid-year if their tax situation has changed or not).

Prior to TY2021 (e.g., see https://www.irs.gov/pub/irs-prior/f2210--2020.pdf) there was a "short method" one could use if "You paid the same amount of estimated tax on each of the four payment due dates." But the "regular" method has always been an option.

[lstone19]

As near as I can figure, they say you should make equal payments because that's just a way to say timely payments are expected and you can't just wait to pay on 4/15 (and probably because they figure the average taxpayer does not have the ability to figure out mid-year if their tax situation has changed or not).

Prior to TY2021 (e.g., see https://www.irs.gov/pub/irs-prior/f2210--2020.pdf) there was a "short method" one could use if "You paid the same amount of estimated tax on each of the four payment due dates." But the "regular" method has always been an option.

True. It just shortcut some of the calculation since if you made equal payments, you could essentially make one calculation since every quarter would have the same surplus or shortage. But unless you check one of the Part II reasons for filing 2210, the IRS asks that you not send 2210 since they have all the information they need for a vanilla 2210. But by all means, complete it yourself to prove you owe no penalty and get a better understanding of how it works (that's what tax software does in the background when it tells you you won't owe a penalty).

[FiveK]

But by all means, complete it yourself....

Indeed! That's why we have a Form2210 tab in our tax estimation spreadsheet.

[lstone19]

But by all means, complete it yourself....

Indeed! That's why we have a Form2210 tab in our tax estimation spreadsheet.

While I don't have an explicit 2210 tab, I do track progress against a tax payment goal. Our withholding is highly variable. I know our 110% of last year's tax and I have an estimate of 90% of this year's (assuming no income surprises - we have a target taxable income which we'll get to with Roth conversions).

Ideally, we'll make estimated payments to clear the 90% safe harbor which I expect to be the lower of the two safe harbors. With withholding variable, I assume there will be no more so for simplicity, allocate YTD withholding 25% to each quarter. When there is later in the year withholding, then the earlier quarters end up overpaid and later quarter estimated payments can be reduced. Each estimated payment date, I determine how much of an estimated payment is needed so that the total of the allocated withholding and estimated payments clears that quarters 90% safe harbor minimum.

But, just in case there's some large unexpected income, I want to make sure we're good on the prior year's tax safe harbor but rather than allocating withholding by quarters, I do it by actual date of withholding. That leads to a different amount that needs to be paid for the next estimated payment (so if our prior year safe harbor amount is $40,000, I just need to make sure that by 4/15, YTD withholding plus Q1 estimated payment is at least $10,000; by 6/15 YTD withholding plus YTD estimate payments is $20,000; by 9/15 YTD withholding plus YTD estimate payments is $30,000; and by 1/15 total withholding plus estimated payments is $40,000). Then, if due to unexpected income we have to use the prior year safe harbor, we would have to file 2210 with the "use actual date of withholding" exception marked in Part II. TT will prompt for the needed information and complete 2210; we would then need to make sure we maintain the needed proof of actual dates of withholding.

Each pay date, I update the spreadsheet with YTD withholding and the spreadsheet takes care of the rest. So, two different amounts to pay at the next estimated payment and I simply pay the higher of the two.

[hachiko]

Thanks, I just downloaded Form 2210 and am working on it.

A lot of misconception about estimated taxes would go away if people would download a 2210 and work through the penalty calculation portion (Part III). A big misconception is that equal payments (part of your original question) are required. They're not. Estimated taxes are accounted for on Part III and as you work through it, nothing asks did you make equal payments. Whether or not you did will make no difference to the penalty calculation. And as you'll see as you work through it, any amount in excess of the minimum you needed to pay in a quarter just carries over to the next quarter. So if mid-year, you realize that you're paying more than you need to, you can just reduce the next quarter's payment. If the penalty calculation comes out to $0 penalty, the IRS will not care if you made equal payments or not (they won't care even if there is a penalty). As near as I can figure, they say you should make equal payments because that's just a way to say timely payments are expected and you can't just wait to pay on 4/15 (and probably because they figure the average taxpayer does not have the ability to figure out mid-year if their tax situation has changed or not).

While your post is correct, it's a bit misleading in my opinion. You have to pay at least 1/4 of the total required payment each quarterly due date. Of course - you are not required to make equal payments. But if the payment you make doesn't get you up to 0.25*[quarter number] of the total amount you're required to pay in estimated taxes, penalties may apply.

So, if you're trying to pay in as little as possible to avoid a penalty, yes, you do need to make equal payments each quarter. Unless another method (seasonal income) is allowed.

[lstone19]

Thanks, I just downloaded Form 2210 and am working on it.

A lot of misconception about estimated taxes would go away if people would download a 2210 and work through the penalty calculation portion (Part III). A big misconception is that equal payments (part of your original question) are required. They're not. Estimated taxes are accounted for on Part III and as you work through it, nothing asks did you make equal payments. Whether or not you did will make no difference to the penalty calculation. And as you'll see as you work through it, any amount in excess of the minimum you needed to pay in a quarter just carries over to the next quarter. So if mid-year, you realize that you're paying more than you need to, you can just reduce the next quarter's payment. If the penalty calculation comes out to $0 penalty, the IRS will not care if you made equal payments or not (they won't care even if there is a penalty). As near as I can figure, they say you should make equal payments because that's just a way to say timely payments are expected and you can't just wait to pay on 4/15 (and probably because they figure the average taxpayer does not have the ability to figure out mid-year if their tax situation has changed or not).

While your post is correct, it's a bit misleading in my opinion. You have to pay at least 1/4 of the total required payment each quarterly due date. Of course - you are not required to make equal payments. But if the payment you make doesn't get you up to 0.25*[quarter number] of the total amount you're required to pay in estimated taxes, penalties may apply.

So, if you're trying to pay in as little as possible to avoid a penalty, yes, you do need to make equal payments each quarter. Unless another method (seasonal income) is allowed.

No, you don't need to make equal payments to avoid a penalty. If later in the year that you find withholding is exceeding expectations or income is lower than expectations, you are free to reduce payments. I made my Q1 estimated payment to assure that 25% of the last year's tax safe harbor was met. Now, with the Q2 payment coming soon, withholding has exceeded expectations. I will make an estimated payment to assure that cumulative amounts through Q2 exceed 50% of the last year's tax safe harbor. That payment will be smaller than the Q1 payment as my revised calculations say I overpaid for Q1 and the excess carries over to Q2. Repeat for Q3. For Q4, I expect that the 90% of this year's tax will be lower so there will a very small if any Q4 estimated payment (by 1/15, I will have almost all the data I need to calculate 90% of this year's tax).

[hachiko]

Thanks, I just downloaded Form 2210 and am working on it.

A lot of misconception about estimated taxes would go away if people would download a 2210 and work through the penalty calculation portion (Part III). A big misconception is that equal payments (part of your original question) are required. They're not. Estimated taxes are accounted for on Part III and as you work through it, nothing asks did you make equal payments. Whether or not you did will make no difference to the penalty calculation. And as you'll see as you work through it, any amount in excess of the minimum you needed to pay in a quarter just carries over to the next quarter. So if mid-year, you realize that you're paying more than you need to, you can just reduce the next quarter's payment. If the penalty calculation comes out to $0 penalty, the IRS will not care if you made equal payments or not (they won't care even if there is a penalty). As near as I can figure, they say you should make equal payments because that's just a way to say timely payments are expected and you can't just wait to pay on 4/15 (and probably because they figure the average taxpayer does not have the ability to figure out mid-year if their tax situation has changed or not).

While your post is correct, it's a bit misleading in my opinion. You have to pay at least 1/4 of the total required payment each quarterly due date. Of course - you are not required to make equal payments. But if the payment you make doesn't get you up to 0.25*[quarter number] of the total amount you're required to pay in estimated taxes, penalties may apply.

So, if you're trying to pay in as little as possible to avoid a penalty, yes, you do need to make equal payments each quarter. Unless another method (seasonal income) is allowed.

No, you don't need to make equal payments to avoid a penalty. If later in the year that you find withholding is exceeding expectations or income is lower than expectations, you are free to reduce payments. I made my Q1 estimated payment to assure that 25% of the last year's tax safe harbor was met. Now, with the Q2 payment coming soon, withholding has exceeded expectations. I will make an estimated payment to assure that cumulative amounts through Q2 exceed 50% of the last year's tax safe harbor. That payment will be smaller than the Q1 payment as my revised calculations say I overpaid for Q1 and the excess carries over to Q2. Repeat for Q3. For Q4, I expect that the 90% of this year's tax will be lower so there will a very small if any Q4 estimated payment (by 1/15, I will have almost all the data I need to calculate 90% of this year's tax).

In that case you overpaid in the prior quarters... I already said you are free to front-load your payments as much as you want. And the fact pattern you provide means that you front-loaded your payments.

By the way, you don't look at withholding through Q2. That's not part of the 25% equation. Withholding, no matter when it's done, comes off the top. In other words, it decreases the total amount you have to pay with estimated payments, so the 25% applies to a smaller amount. $1,200 liability with $200 extra withholding in Q1 means you need to pay $250 in Q1, NOT $100 (which would be $300-$200).

[lstone19]

No, you don't need to make equal payments to avoid a penalty. If later in the year that you find withholding is exceeding expectations or income is lower than expectations, you are free to reduce payments. I made my Q1 estimated payment to assure that 25% of the last year's tax safe harbor was met. Now, with the Q2 payment coming soon, withholding has exceeded expectations. I will make an estimated payment to assure that cumulative amounts through Q2 exceed 50% of the last year's tax safe harbor. That payment will be smaller than the Q1 payment as my revised calculations say I overpaid for Q1 and the excess carries over to Q2. Repeat for Q3. For Q4, I expect that the 90% of this year's tax will be lower so there will a very small if any Q4 estimated payment (by 1/15, I will have almost all the data I need to calculate 90% of this year's tax).

In that case you overpaid in the prior quarters... I already said you are free to front-load your payments as much as you want. And the fact pattern you provide means that you front-loaded your payments.

Well, sort of. I didn't deliberately front load them. The Q1 payment was correct for the information I had in early April. But as I said, Q2 withholding exceeded expectations. They're called estimated tax payments because they're based on estimates and like all estimates, things change. For some of us, estimating taxes is not just do it once in April and then assume nothing has changed.

[hachiko]

No, you don't need to make equal payments to avoid a penalty. If later in the year that you find withholding is exceeding expectations or income is lower than expectations, you are free to reduce payments. I made my Q1 estimated payment to assure that 25% of the last year's tax safe harbor was met. Now, with the Q2 payment coming soon, withholding has exceeded expectations. I will make an estimated payment to assure that cumulative amounts through Q2 exceed 50% of the last year's tax safe harbor. That payment will be smaller than the Q1 payment as my revised calculations say I overpaid for Q1 and the excess carries over to Q2. Repeat for Q3. For Q4, I expect that the 90% of this year's tax will be lower so there will a very small if any Q4 estimated payment (by 1/15, I will have almost all the data I need to calculate 90% of this year's tax).

In that case you overpaid in the prior quarters... I already said you are free to front-load your payments as much as you want. And the fact pattern you provide means that you front-loaded your payments.

Well, sort of. I didn't deliberately front load them. The Q1 payment was correct for the information I had in early April. But as I said, Q2 withholding exceeded expectations. They're called estimated tax payments because they're based on estimates and like all estimates, things change. For some of us, estimating taxes is not just do it once in April and then assume nothing has changed.

Right, I'm not saying you did anything wrong. From what I understand based on your facts you made the correct payment in Q1 (25% of the safe harbor). However, just because your situation changed doesn't mean you didn't front load your payments. You did front load your payments even if that wasn't your intent when you made your first payment.

[lstone19]

Right, I'm not saying you did anything wrong. From what I understand based on your facts you made the correct payment in Q1 (25% of the safe harbor). However, just because your situation changed doesn't mean you didn't front load your payments. You did front load your payments even if that wasn't your intent when you made your first payment.

I accept that. I’m just trying to stop the “you MUST make equal payments” or unspeakable horrors will ensue. I think we can agree that for those of who understand how 2210 works, our goal is to ensure the penalty is zero without making larger than necessary estimated payments and that includes reducing later payments when we find that due to changed circumstances, we overpaid (front loaded) earlier quarter payments.

Even though 2210 looks at each quarter independently although has the carryover from quarter to quarter, I prefer to look at each quarter as a cumulative requirement: Q1 must be 25% of my minimum annual payment, Q1/Q2 combined must be 50%, Q1/Q2/combined must be 75%, and the total for the year must be 100%. When you do it that way, there’s no need to calculate carryovers.

[toddthebod]

Right, I'm not saying you did anything wrong. From what I understand based on your facts you made the correct payment in Q1 (25% of the safe harbor). However, just because your situation changed doesn't mean you didn't front load your payments. You did front load your payments even if that wasn't your intent when you made your first payment.

I accept that. I’m just trying to stop the “you MUST make equal payments” or unspeakable horrors will ensue. I think we can agree that for those of who understand how 2210 works, our goal is to ensure the penalty is zero without making larger than necessary estimated payments and that includes reducing later payments when we find that due to changed circumstances, we overpaid (front loaded) earlier quarter payments.

Even though 2210 looks at each quarter independently although has the carryover from quarter to quarter, I prefer to look at each quarter as a cumulative requirement: Q1 must be 25% of my minimum annual payment, Q1/Q2 combined must be 50%, Q1/Q2/combined must be 75%, and the total for the year must be 100%. When you do it that way, there’s no need to calculate carryovers.

Schedule AI does precisely that. Well, not precisely per se, because the "quarters" aren't all the same length, but it is cumulative.

[lstone19]

Right, I'm not saying you did anything wrong. From what I understand based on your facts you made the correct payment in Q1 (25% of the safe harbor). However, just because your situation changed doesn't mean you didn't front load your payments. You did front load your payments even if that wasn't your intent when you made your first payment.

I accept that. I’m just trying to stop the “you MUST make equal payments” or unspeakable horrors will ensue. I think we can agree that for those of who understand how 2210 works, our goal is to ensure the penalty is zero without making larger than necessary estimated payments and that includes reducing later payments when we find that due to changed circumstances, we overpaid (front loaded) earlier quarter payments.

Even though 2210 looks at each quarter independently although has the carryover from quarter to quarter, I prefer to look at each quarter as a cumulative requirement: Q1 must be 25% of my minimum annual payment, Q1/Q2 combined must be 50%, Q1/Q2/combined must be 75%, and the total for the year must be 100%. When you do it that way, there’s no need to calculate carryovers.

Schedule AI does precisely that. Well, not precisely per se, because the "quarters" aren't all the same length, but it is cumulative.

True that AI does things cumulatively but it’s for unequal INCOME. The base 2210 handles unequal PAYMENTS just fine. There is no need to mess with Schedule AI for unequal payments. It should be your option of last resort when none of the easier methods have reduced a penalty to zero and unless you had back-loaded income, it will not help.

[Katietsu]

Personally, I dislike applying the refund to the following year taxes. The primary reason is that it is not rare for the IRS or state tax department to issue a refund. In calendar year 2021, I had only a small $11 refund so I decided to break with my policy and apply to 2021 taxes. In March of 2022, just days before I planned to e-file, I received an $11 check. While I realize it was not a big deal either way, it would have been annoying.

Second negative for me is that it is easier to overlook by myself or, especially, if someone else needed to take over. Though good documentation would hopefully address this issue.

That said, I realize there are times when it makes sense either for administrative reasons or to avoid a large Q1 estimated payment while still owed a large refund.

[Carno]

Personally, I dislike applying the refund to the following year taxes. The primary reason is that it is not rare for the IRS or state tax department to issue a refund. In calendar year 2021, I had only a small $11 refund so I decided to break with my policy and apply to 2021 taxes. In March of 2022, just days before I planned to e-file, I received an $11 check. While I realize it was not a big deal either way, it would have been annoying.

Second negative for me is that it is easier to overlook by myself or, especially, if someone else needed to take over. Though good documentation would hopefully address this issue.

That said, I realize there are times when it makes sense either for administrative reasons or to avoid a large Q1 estimated payment while still owed a large refund.

This is what happened to me in 2021. I missed and did not include $2,000+ applied from 2020 to my estimated tax paid for 2021. Then I received a mystery check from IRS for exactly to that amount (exact to the penny) some time later. At that time I couldn't figure out the reason for this refund. This year while I was preparing my taxes for 2022 and reviewing (comparing with) 2021 taxes, I discovered my error of not including that amount.