IRS Safe Harbor calculations

[anotheruser]

Bogleheads,

I am trying to understand how do I calculate the safe harbor for taxes for this year so I do not have to pay penalty when filing taxes for 2024. Apologize if some of the questions are very fundamental and obvious, but I am asking as I am confused.

I am trying to use the safe harbor rule " Paid at least 100% of the tax you owed for last year"

How do I check what I owed last year? - I am assuming this is 1040 #24 titled "This is your total tax". Is this correct?

How do I make sure how much I am withholding in tax this year? - I am looking at my pay check and calculating what I will be withholding based on the "Federal Taxes" withheld per pay cheque. Is that correct? Do I consider SS, medicare in there or just federal tax?

Again apologize for a silly question, I am myself surprised how I thought I always knew this but turns out when you get into details it gets confusing.

Thanks!

[Alan S.]

Bogleheads,

I am trying to understand how do I calculate the safe harbor for taxes for this year so I do not have to pay penalty when filing taxes for 2024. Apologize if some of the questions are very fundamental and obvious, but I am asking as I am confused.

I am trying to use the safe harbor rule " Paid at least 100% of the tax you owed for last year"

How do I check what I owed last year? - I am assuming this is 1040 #24 titled "This is your total tax". Is this correct?

How do I make sure how much I am withholding in tax this year? - I am looking at my pay check and calculating what I will be withholding based on the "Federal Taxes" withheld per pay cheque. Is that correct? Do I consider SS, medicare in there or just federal tax?

Again apologize for a silly question, I am myself surprised how I thought I always knew this but turns out when you get into details it gets confusing.

Thanks!

Yes, line 24 of your 2023 return is your total tax liability for 2023. This is the amount you must pay in by withholding or estimated tax payments for 2024. This assumes that your AGI for 2023 was not over 150,000. If it was, then you must pay in 110% instead of 100%.

Determine how much federal income tax is being withheld (fed tax only) and your year to date total. If you have no other withholding and do not pay quarterly estimates, and you project that you will fall short, then increase your withholding for the rest of the year. Also, note that if you will owe less than 1000, there will also be no penalty.

If your taxes will be lower this year due to lower income or any other reason, you can also avoid a penalty if you pay in 90% of your current year taxes, but this is harder to determine at this time since your total income can only be projected and your tax return will not be filed until next year. But you are OK if you either pay in 100%/110% of prior year or 90% of current year taxes.

Timing of your withholding is not an issue as it would be if you were paying estimates.

[anotheruser]

Thanks!
My AGI was over 150K, so looks like I am needing 110% in that case.

Timing of your withholding is not an issue as it would be if you were paying estimates.

With my calculation it does appear I will be falling short and not make it to 110%. Should I make estimated payments now or increase the withholding. I did not understand your comment about "timing is not an issue".

[increment]

Should I make estimated payments now or increase the withholding. I did not understand your comment about "timing is not an issue".

To avoid a penalty, you should increase withholding. Any payment made through withholding is treated as "on time."

The government is glad to accept any estimated payments. However, there are four due dates (the 15th of April, June, September, and January), and to avoid a penalty you need to pay an appropriate amount by each of those dates. For the 2024 tax year, two of those dates have passed.

[anotheruser]

Thank you!

I will work on increasing the withholding. I have extra income but that started pouring only in August hence the scramble.

[toddthebod]

How do I check what I owed last year? - I am assuming this is 1040 #24 titled "This is your total tax". Is this correct?

Not quite. See the instructions for form 2210, line 8.

Add these:

Line 22,
Schedule 2 (Form 1040):
Line 4,
Line 8 (additional tax on distributions only),
Line 9,*
Line 10,
Line 11,
Line 12,
Line 14,
Line 15,
Line 16,
Line 17a,
Line 17c,
Line 17d,
Line 17e,
Line 17f,
Line 17g,
Line 17h,
Line 17i,
Line 17j,
Line 17l, and
Line 17z

Then subtract these refundable credits:

Earned income credit.

• Additional child tax credit.

• Refundable part of the American opportunity credit (Form 8863,
line 8).
• Premium tax credit (Form 8962).
• Credit for federal tax paid on fuels.
• Qualified sick and family leave credits from Schedule(s) H
(Schedule 3 (Form 1040), lines 13b and 13h).
• Credit determined under section 1341(a)(5)(B).

(Note that these line numbers are from 2022 for your 2023 taxes. I haven't checked if they've changed Schedule 2, so you should double check that the line numbers are the same on your 2023 form, since the instructions aren't out yet for your 2024 return.)

[anotheruser]

Also I have some RSU that are going to be vested this year. At the time of vesting the employer/brokerage will withhold taxes. I am assuming that amount will also be part of my withholding for this year ( meaning considered same as that withheld from my pay).
Basically I can add my paycheck withholding for each pay and the one time RSU withholding to get my total withholding for this year. Is this correct?

[toddthebod]

Also I have some RSU that are going to be vested this year. At the time of vesting the employer/brokerage will withhold taxes. I am assuming that amount will also be part of my withholding for this year ( meaning considered same as that withheld from my pay).
Basically I can add my paycheck withholding for each pay and the one time RSU withholding to get my total withholding for this year. Is this correct?

Yes, that is considered withholding.

[deltaneutral83]

Am I understanding that with a MFJ AGI over 150k, as long as you pay in 110% of the prior year's tax liability for the current year, you are good to go for the current year with regards to penalites/interest?

[Artsdoctor]

Am I understanding that with a MFJ AGI over 150k, as long as you pay in 110% of the prior year's tax liability for the current year, you are good to go for the current year with regards to penalites/interest?

Yes.

[sailaway]

Am I understanding that with a MFJ AGI over 150k, as long as you pay in 110% of the prior year's tax liability for the current year, you are good to go for the current year with regards to penalites/interest?

If done via withholdings, yes. Estimated taxes are meant to be timely and you can be hit with penalties for not submitting them throughout the year unless your income cam suddenly at the end of the year.

[deltaneutral83]

Am I understanding that with a MFJ AGI over 150k, as long as you pay in 110% of the prior year's tax liability for the current year, you are good to go for the current year with regards to penalites/interest?

If done via withholdings, yes. Estimated taxes are meant to be timely and you can be hit with penalties for not submitting them throughout the year unless your income cam suddenly at the end of the year.

That's the interesting part, what if you do indeed have k1 income the second half of the year? Talking out loud, seems like you wouldn't be required to make estimated taxes (in say, Q1 or Q2) when the income hasn't even been earned until q3 or q4? And how does the IRS date the k1 income earned?

[sailaway]

Am I understanding that with a MFJ AGI over 150k, as long as you pay in 110% of the prior year's tax liability for the current year, you are good to go for the current year with regards to penalites/interest?

If done via withholdings, yes. Estimated taxes are meant to be timely and you can be hit with penalties for not submitting them throughout the year unless your income cam suddenly at the end of the year.

That's the interesting part, what if you do indeed have k1 income the second half of the year? Talking out loud, seems like you wouldn't be required to make estimated taxes (in say, Q1 or Q2) when the income hasn't even been earned until q3 or q4? And how does the IRS date the k1 income earned?

You fill out the correct forms.

[Kruser64]

I thought as long as you paid estimated taxes in 4 equal installments that added up to at least 110% of the previous year's tax, it didn't matter when the current year income was realized or how much the income was. That's why it's called a Safe Harbor. Does not mean you won't owe more at tax time, just means no penalty.

[rkhusky]

I thought as long as you paid estimated taxes in 4 equal installments that added up to at least 110% of the previous year's tax, it didn't matter when the current year income was realized or how much the income was. That's why it's called a Safe Harbor. Does not mean you won't owe more at tax time, just means no penalty.

If all your income came in January, you would have a penalty if you made four equal estimated payments.
Default is 25% of min tax due each quarter.

[deltaneutral83]

I thought as long as you paid estimated taxes in 4 equal installments that added up to at least 110% of the previous year's tax, it didn't matter when the current year income was realized or how much the income was. That's why it's called a Safe Harbor. Does not mean you won't owe more at tax time, just means no penalty.

If all your income came in January, you would have a penalty if you made four equal estimated payments.

But if you withheld 110% of last year's tax liability via w4 over any time period of current year, that all counts toward current year as if it were paid in Jan ?

[newacct]

I thought as long as you paid estimated taxes in 4 equal installments that added up to at least 110% of the previous year's tax, it didn't matter when the current year income was realized or how much the income was. That's why it's called a Safe Harbor. Does not mean you won't owe more at tax time, just means no penalty.

If all your income came in January, you would have a penalty if you made four equal estimated payments.

No you wouldn't. Equal installments is always sufficient. Your required payments will never be more frontloaded than the equal installment line (although it could be backloaded if you made more income late in the year and you use the annualized income method). Even if you use the annualized income method, it will not require you to pay more than the equal installment line.

[Mullins]

Am I understanding that with a MFJ AGI over 150k, as long as you pay in 110% of the prior year's tax liability for the current year, you are good to go for the current year with regards to penalites/interest?

If done via withholdings, yes. Estimated taxes are meant to be timely and you can be hit with penalties for not submitting them throughout the year unless your income cam suddenly at the end of the year.

That's the interesting part, what if you do indeed have k1 income the second half of the year? Talking out loud, seems like you wouldn't be required to make estimated taxes (in say, Q1 or Q2) when the income hasn't even been earned until q3 or q4? And how does the IRS date the k1 income earned?

Form 2210, there's a section where you list YTD income for the quarters listed (they do not match actual quarters) and list amounts and dates estimated payments were made. This shows the IRS that your income was staggered and (if paid correctly) the payments appropriate to eliminate any underpayment penalties.

[rkhusky]

I thought as long as you paid estimated taxes in 4 equal installments that added up to at least 110% of the previous year's tax, it didn't matter when the current year income was realized or how much the income was. That's why it's called a Safe Harbor. Does not mean you won't owe more at tax time, just means no penalty.

If all your income came in January, you would have a penalty if you made four equal estimated payments.

No you wouldn't. Equal installments is always sufficient. Your required payments will never be more frontloaded than the equal installment line (although it could be backloaded if you made more income late in the year and you use the annualized income method). Even if you use the annualized income method, it will not require you to pay more than the equal installment line.

You’re right. The default is 25% of min tax each quarter. Annualizing only applies if it helps you.

[MarkNYC]

... what if you do indeed have k1 income the second half of the year? Talking out loud, seems like you wouldn't be required to make estimated taxes (in say, Q1 or Q2) when the income hasn't even been earned until q3 or q4? And how does the IRS date the k1 income earned?

For estimated tax penalty purposes, the IRS will consider the K-1 income to be earned evenly throughout the year. The individual partner or S Corp shareholder can annualize income if the income was received late in the year, but it would be based on when the entity (partnership or S Corp) received the income, not based on when the individual received the distribution from the entity.

[heartwood]

RMDs may complicate this a little.

If subject to RMDs you should consider how much WH you do on your 2024 RMD to maintain Safe Harbor. In addition to the Federal requirement, my state requires paying 100% of last year's tax owed to reach Safe Harbor.

You should already know your 2024 RMD amounts based upon your closing 2023 IRA balances and calculations. Vanguard provides these numbers in January of each year if all your IRAs are at Vanguard. Otherwise you may need to do multiple calculations if you have IRAs at other providers.

I have a small spreadsheet that does the Safe Harbor calculation based on 2023 tax paid, both Federal and State. I then calculate(estimate) my 2024 Federal and State WHs from pensions and SS. By difference I get the amount I need prior to my 2024 RMD to reach Safe Harbor. I then iterate around the RMD amount to calculate what I need in Federal and State WH.

When I take my RMD I have Vanguard withold an amount (by percentage) slightly above my calculated numbers.

I do recognize the 2024 Safe Harbor (based on 2023) does not necessarily include the 2024 RMDs, but wish to come close to what I owe for the succeeding year.

[SnowBog]

Just to note it, the above is all specific to federal taxes.

If you live in a state with state income taxes, you'll need to check in with them as well. My state follows similar safe harbor rules as the feds, but not sure if they all do... I do know one year I was hit with a state penalty - despite hitting safe harbor - due to not making timely estimated "quarterly" tax payments. (That was the year I "learned" that they aren't exactly "quarterly", at least not in a calendar or equal 4 parts of the year [aka 3 months] sense.) IIRC I didn't have that issue with the IRS despite making the same mistake. <shrug>

[minesweep]

Just to note it, the above is all specific to federal taxes.

If you live in a state with state income taxes, you'll need to check in with them as well. My state follows similar safe harbor rules as the feds, but not sure if they all do... I do know one year I was hit with a state penalty - despite hitting safe harbor - due to not making timely estimated "quarterly" tax payments. (That was the year I "learned" that they aren't exactly "quarterly", at least not in a calendar or equal 4 parts of the year [aka 3 months] sense.) IIRC I didn't have that issue with the IRS despite making the same mistake. <shrug>

Applicable State Tax Withholding

[lstone19]

No you wouldn't. Equal installments is always sufficient. Your required payments will never be more frontloaded than the equal installment line (although it could be backloaded if you made more income late in the year and you use the annualized income method). Even if you use the annualized income method, it will not require you to pay more than the equal installment line.

You’re right. The default is 25% of min tax each quarter. Annualizing only applies if it helps you.

There are two significant option available on Form 2210 that may be selected at your option. You are never forced to use either of these so it only makes sense to do so if it benefits you. First and easiest is to treat withholding as occurring in the actual quarter of withholding rather than equally distributed over the year. Can be useful if your withholding was front-loaded in the year (e.g. early in the year bonus or you retire mid-year). The other and far more complicated is annualizing income. Useful when your income is back-loaded. You are always allowed to use the defaults of both income and withholding being equally distributed over the year.

[ssel]

Also I have some RSU that are going to be vested this year. At the time of vesting the employer/brokerage will withhold taxes. I am assuming that amount will also be part of my withholding for this year ( meaning considered same as that withheld from my pay).
Basically I can add my paycheck withholding for each pay and the one time RSU withholding to get my total withholding for this year. Is this correct?

Yes, that is considered withholding.

If you're subject to Additional Medicare Tax withholding, then Medicare withholding above 1.45% of your total reported wage income should also be counted as "withholding" for this purpose.

They love to make it complicated.

[random_walker_77]

Also I have some RSU that are going to be vested this year. At the time of vesting the employer/brokerage will withhold taxes. I am assuming that amount will also be part of my withholding for this year ( meaning considered same as that withheld from my pay).
Basically I can add my paycheck withholding for each pay and the one time RSU withholding to get my total withholding for this year. Is this correct?

Yes, but a word of caution, rsu withholding is at a set rate of 22%, which is probably lower than your marginal tax bracket rate. Plan on setting aside more, some of which you might need to pay via estimated taxes, but all of which is definitely due next April. If applicable, don't forget about state taxes too