Tax Underpayment Penalty Question

[N10sive]

Hello I have a preemptive question regarding underpaying taxes.

I won a gambling jackpot this year and along with some individual stock I sold and a house down payment in cd’s, I may have close to 25k of cash of which nothing has been taxed.

Will I be penalized for not paying taxes up front for these or how is it normally handled? I’ve never have had this much saved in savings and winning an unexpected casino jackpot etc.

I generally have 1k returned come tax time however I imagine I’ll owe 3-4K at minimum. I see you have to pay 90% of tax before being penalized.

I assume I am past the quarterly payments anyways but just wondering how people account for these types of things.

[secondcor521]

Yes, you may be assessed an underpayment penalty.

Normally this situation is addressed by estimated tax payments.

The last quarterly payment is due about January 15th.

(Even if you make an estimated payment, depending on the timing of your extra income you theoretically still could be assessed an underpayment penalty. However, if you owe less than $1000 at tax time, in my experience you probably won't be assessed the penalty.)

[tibbitts]

Hello I have a preemptive question regarding underpaying taxes.

I won a gambling jackpot this year and along with some individual stock I sold and a house down payment in cd’s, I may have close to 25k of cash of which nothing has been taxed.

Will I be penalized for not paying taxes up front for these or how is it normally handled? I’ve never have had this much saved in savings and winning an unexpected casino jackpot etc.

I generally have 1k returned come tax time however I imagine I’ll owe 3-4K at minimum. I see you have to pay 90% of tax before being penalized.

I assume I am past the quarterly payments anyways but just wondering how people account for these types of things.

There's no one simple answer without more information. You need to say how much you received in 2023 for these items, and what dates, what your total taxable income for 2022 was, and what percentage of your tax liability for 2022 you've paid as withholdings in 2023 (or will have paid by the end of 2023.) I'm somewhat surprised nothing was withheld on gambling winnings but don't have any experience with that.

[LotsaGray]

Hello I have a preemptive question regarding underpaying taxes.

I won a gambling jackpot this year and along with some individual stock I sold and a house down payment in cd’s, I may have close to 25k of cash of which nothing has been taxed.

Will I be penalized for not paying taxes up front for these or how is it normally handled? I’ve never have had this much saved in savings and winning an unexpected casino jackpot etc.

I generally have 1k returned come tax time however I imagine I’ll owe 3-4K at minimum. I see you have to pay 90% of tax before being penalized.

I assume I am past the quarterly payments anyways but just wondering how people account for these types of things.

There's no one simple answer without more information. You need to say how much you received in 2023 for these items, and what dates, what your total taxable income for 2022 was, and what percentage of your tax liability for 2022 you've paid as withholdings in 2023 (or will have paid by the end of 2023.) I'm somewhat surprised nothing was withheld on gambling winnings but don't have any experience with that.

Most places federal gambling winnings withholding is optional. Reporting is required but not withholding. State obviously varies by state. Also varies with casino "type". On indian reservations I don't believe state is ever withheld but still voluntary fed withholding.)

[cchrissyy]

depending on your other income and how steady it is, you might already be in the safe harbor that compares your current year taxes withheld to the prior year's bill.

[N10sive]

depending on your other income and how steady it is, you might already be in the safe harbor that compares your current year taxes withheld to the prior year's bill.

So if I meet the 100% tax payment for previous year I should be fine?

Regarding the other questions,

(Surprisingly the casino I was at didn’t even ask for federal withholding)

~15k was won in Oct
~5k will be CD interest over the year
~5K cap gains probably realized in dec(haven’t sold yet)

I’ve paid all my taxes for year 2022(actually got around a 1k refund). Total taxable income for 2022 was 138k with an effective tax rate of ~18% (agi was ~151k).

If it matters my income rose 20k this year.

[FiveK]

So if I meet the 100% tax payment for previous year I should be fine?
...
I’ve paid all my taxes for year 2022(actually got around a 1k refund). Total taxable income for 2022 was 138k....

Maybe - depends on what you mean by "taxable income". That phrase is sometimes used to mean "Adjusted Gross Income" (AGI) but on Form 1040 the "taxable income" is what you have after subtracting your standard (or itemized) deduction from your AGI.

See Safe harbors for specifics.

[Dufus]

From https://www.irs.gov/payments/underpayme ... ls-penalty

Avoid a Penalty
To avoid a penalty, pay your correct estimated taxes on time. Find how to figure and pay estimated taxes.

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

Your filed tax return shows you owe less than $1,000 or
You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.

[MrJedi]

The 100%/110% previous year tax safe harbor provision helps prevent underpayment issues for those unfamiliar with the rules and have one-time lumpy income like you are describing, since you can qualify based on the previous year tax that did not have the one-time lumpy income. I still recommend doing some reading on safe harbor though. Likely useful to know for future purposes.

[tibbitts]

The 100%/110% previous year tax safe harbor provision helps prevent underpayment issues for those unfamiliar with the rules and have one-time lumpy income like you are describing, since you can qualify based on the previous year tax that did not have the one-time lumpy income. I still recommend doing some reading on safe harbor though. Likely useful to know for future purposes.

Yes, but as far as I know the 100%/110% breakpoint isn't inflation-indexed (also true with NIIT and some other limits), so that's something to watch out for when planning tax payments for any given current/future year.

[ResearchMed]

It's probably late for this, given it's almost the end of November (meaning, only December paychecks might be usable), but ANY "withholding" is always considered timely.

So IF you have any way to get more withheld from a regular paycheck, and you up that amount to whatever might be needed to get to safe harbor, that would save any penalties/interest.

I don't know your age, but another way to get extra withholding is to remove money from an IRA, and request that all/almost all of it be withheld.

And then, IF you haven't used the "60 day deadline to replace money in an IRA" within the past year, you could then use "other money" to replace the withdrawn IRA money, and end up without reducing your tax-deferred totals.

RM

[Artsdoctor]

How old are you?

First, take a look at how much your total tax bill was in 2022. You need to match that.

Second, do you have access to adjusting your withholding taxes? Either through your employer or via RMDs? As long as your withholding is the same as your 2022 tax bill, you're fine.

If you can't change your withholding, then you need to make an estimated tax payment if you haven't withheld enough for a "safe harbor." Your fourth quarter estimated tax is due in January so there's time. If your income bolus was earlier this year, you'll pay a penalty for being late. If you have to go that route, you'll need to take a look at Form 2210.

[secondcor521]

First, take a look at how much your total tax bill was in 2022. You need to match that.

Not true.

OP can avoid underpayment penalties by paying 90% of the current year's tax liability, or owing less than $1000. Either of those two safe harbors can be achieved without paying the same amount as 2022. This would be typical and expected if their 2023 income was less than 2022.

Second, if the OP is high income and don't qualify for the other safe harbors, they need to pay 110% of their 2022 tax bill, not 100%.

[lakpr]

Given that the gambling winnings occurred in October, and the stock sale will be in December, the deadline for estimated tax payment is January 15, 2024. He hadn't missed a tax payment deadline, YET.

Estimate payment for the gambling winnings (taxed as ordinary income, and given the specifics of income, I believe the OP is in 22% tax bracket if Married Filing Jointly, 24% tax bracket if filing Single), so estimated tax = a quarter of the winnings.

Capital gains on the stock sales are taxed at 15% if MFJ, or 18.8% if Single, so estimated tax = approximately 20% of the gains.

Sum these up, send off the estimated payment before Jan-15-2024 to IRS, and avoid penalty.

[erp]

I’ve paid all my taxes for year 2022(actually got around a 1k refund). Total taxable income for 2022 was 138k with an effective tax rate of ~18% (agi was ~151k).

If it matters my income rose 20k this year.

At 151k agi last year, you need to withhold 110% of last year's tax:

138k * .18 * 1.1 = 27.33k

Look at your last paycheck stub and see if your w/h will make it by the end of the year (it might, since your salary went up 20k). If not, increase your W-4 withholding a bit on the final 2-3 paychecks this year.

[N10sive]

[quote=N10sive post_id=7557831 time=<a href="tel:1700515124">1700515124</a> user_id=109287]
I’ve paid all my taxes for year 2022(actually got around a 1k refund). Total taxable income for 2022 was 138k with an effective tax rate of ~18% (agi was ~151k).

If it matters my income rose 20k this year.

At 151k agi last year, you need to withhold 110% of last year's tax:

138k * .18 * 1.1 = 27.33k

Look at your last paycheck stub and see if your w/h will make it by the end of the year (it might, since your salary went up 20k). If not, increase your W-4 withholding a bit on the final 2-3 paychecks this year.
[/quote]

Is that just federal? Or ss/med included? I’ll pry be pretty close if it’s just fed like close to 1k difference which should be okay?

Can you increase w4 withholding if I’m already at 0 deductions?

[Artsdoctor]

First, take a look at how much your total tax bill was in 2022. You need to match that.

Not true.

OP can avoid underpayment penalties by paying 90% of the current year's tax liability, or owing less than $1000. Either of those two safe harbors can be achieved without paying the same amount as 2022. This would be typical and expected if their 2023 income was less than 2022.

Second, if the OP is high income and don't qualify for the other safe harbors, they need to pay 110% of their 2022 tax bill, not 100%.

This is all true. If he's able to gauge exactly what that 90% is, go for it. I've always found that guessing 90% is hard but my tax situation is more complicated than most. I guessed that the OP's income for 2023 would be much higher than 2022 so aiming for 100% of 2022's tax bill would be easier. The 110% is of course applicable to high income individuals and this was pointed out earlier (MFJ with AGI of > $150,000).

[N10sive]

Okay judging by all the info I am going to just make a payment in case.

So I can just go online and pay through the irs links? What happens when I go to file my taxes? Are there specific items I need to fill out? I see the 1040-ES form but I’ll pry pay online.

Thanks for all this info it has been very informative and helpful.

[Grt2bOutdoors]

Okay judging by all the info I am going to just make a payment in case.

So I can just go online and pay through the irs links? What happens when I go to file my taxes? Are there specific items I need to fill out? I see the 1040-ES form but I’ll pry pay online.

Thanks for all this info it has been very informative and helpful.

Go to DirectPay under IRS.gov link. When you file your taxes, there will be a line item that states - estimated taxes paid, fill in the blank. Line 26 under Form 1040.

[FactualFran]

Okay judging by all the info I am going to just make a payment in case.

Making an estimated payment for the fourth quarter does not eliminate the possibility of having underpayment penalties for the first three quarters.

Filing an income tax return that includes Form 2210 with its Schedule AI completed can reduce or eliminate the underpayment penalty. However, completing Schedule AI can be time consuming.

The form used by employees for income tax withholding has an entry for a dollar amount to be withheld every pay period in addition to the amount withheld based on other factors, such as amount paid and filing status (such married filing jointly).

[N10sive]

Okay judging by all the info I am going to just make a payment in case.

Making an estimated payment for the fourth quarter does not eliminate the possibility of having underpayment penalties for the first three quarters.

Filing an income tax return that includes Form 2210 with its Schedule AI completed can reduce or eliminate the underpayment penalty. However, completing Schedule AI can be time consuming.

The form used by employees for income tax withholding has an entry for a dollar amount to be withheld every pay period in addition to the amount withheld based on other factors, such as amount paid and filing status (such married filing jointly).

Well I’m hoping it takes into account this extra income was received end of sept and onward so paying now would fix that. Not sure how it works.

I see you can have extra withheld on the w4 which I will be doing for next year since I have a low six figure savings now for a house but not buying anytime soon.

[LotsaGray]

Given that the gambling winnings occurred in October, and the stock sale will be in December, the deadline for estimated tax payment is January 15, 2024. He hadn't missed a tax payment deadline, YET.

Estimate payment for the gambling winnings (taxed as ordinary income, and given the specifics of income, I believe the OP is in 22% tax bracket if Married Filing Jointly, 24% tax bracket if filing Single), so estimated tax = a quarter of the winnings.

Capital gains on the stock sales are taxed at 15% if MFJ, or 18.8% if Single, so estimated tax = approximately 20% of the gains.

Sum these up, send off the estimated payment before Jan-15-2024 to IRS, and avoid penalty.

Lumpy estimated payments as suggested can still result in penalties since the payments are intended to be "timely". You can still avoid but it may require extra work of annualizing. This is the advantage of withholding since even if all the taxes were withheld at the end of the year, all withholding is considered "timely" regardless of when withheld.

[erp]

I’ll pry be pretty close if it’s just fed like close to 1k difference which should be okay?

Can you increase w4 withholding if I’m already at 0 deductions?

For 1k, IMO you have a couple of alternatives:

1. Update your W-4 to withhold an extra 1k by the end of the year. Just remember to reset that in January so that you don't overwithhold by a lot next year ==> no penalty
2. Ignore it and just file in Mar or Apr. The IRS will count the 1000 shortfall as four $250 quarterly shortfalls and charge interest, which is about $50 total. IME the IRS will forgive this amount if you check the box in turbotax to *not* calculate the penalty (ie let the IRS calculate it and bill you) ==> probably no penalty
3. Pay 4th q estimated tax before Jan deadline and the fill in the lumpy income form ==> no penalty, but a lot of work
4. Pay the $1000 as estimated payment right now, but don't bother with form 2210. The interest penalty will be even smaller (since interest stopped accruing as soon as you paid the 1k) and even more likely to be forgiven by the IRS ==> most likely no penalty

[FiveK]

Can you increase w4 withholding if I’m already at 0 deductions?

Yes, but the current Form W-4 doesn't use allowances (aka deductions) anymore.

Step 4c on that form is where you enter extra withholding, above whatever your choice in 1c calculates.