Quarterly Estimated Tax

[Bali Hai Again]

What is the name of your state? New York

i plan to pay quarterly estimated tax sometime in the future. I estimate total income for that year and make even quarterly payments to IRS on time.

I file the tax return in February and discover that I owe an additional $999. Two questions: 1) Will I be assessed an underpayment penalty? 2) Can I file the return in February and pay the outstanding $999 in April with no penalty?

Thank you in advance for any input.

 

[LdiJ]

What is the name of your state? New York

i plan to pay quarterly estimated tax sometime in the future. I estimate total income for that year and make even quarterly payments to IRS on time.

I file the tax return in February and discover that I owe an additional $999. Two questions: 1) Will I be assessed an underpayment penalty?

If you have paid in at least 90% of the current year obligation or 100% of the prior year obligation (whichever is less) then there is no underwithholding penalty.

2) Can I file the return in February and pay the outstanding $999 in April with no penalty?

Yes, your balance due payment due date is April 15th.

Thank you in advance for any input.

 

[Taxing Matters]

What is the name of your state? New York

I file the tax return in February and discover that I owe an additional $999. Two questions: 1) Will I be assessed an underpayment penalty?

Not if you pay the $999 by April 15. The underpayment/late payment penalty only applies to balances owed after the due date for payment. If what you really wanted to know was whether you'll have an estimated tax penalty, the return details matter but generally if you don't owe more than $1000 in tax when you file your return and your estimated payments were timely paid then there is no estimated tax penalty. You came about as close to that line as you can get without potentially triggering that penalty, but even being just on the right side of the line is still good.

2) Can I file the return in February and pay the outstanding $999 in April with no penalty?

That's not a choice most people make, but yes, you may do that. The late payment penalty only starts to run if you don't have it paid by April 15. That's the deadline for payment of the tax.

 

[Bali Hai Again]

Thank you both for your invaluable information. In the past I have adjusted my W-4 withholding throughout the year to break even or just owe a little bit of tax. Now all of my income is passive and the tax strategy is different.

To summarize: Let’s say my income estimate for the year is perfect. I will owe theoretically $10k tax. 90% equals $9k. $9k is divided equally into 4 quarterly payments of $2250 each quarter. I make those payments on time. When I file my return, I owe $1k that can be paid on April 15. There are no penalties and my deliberate planning for this outcome is perfectly legal.

 

[Taxing Matters]

Since there can be all different kinds of outcomes, the best thing to do is read and understand the rules for the estimated payments that are explained in great detail in IRS Publication 505. (Though the 2024 publication is not out yet; it should be available by sometime next month. There have been no major changes to the rules, however, just some number changes to to inflation adjustments) and more briefly on the IRS page on Estimated Payments. In your example, you'd be fine. The IRS computer assumes income is earned equally throughout the year and thus expects to see four equal payments. As I stated before, and as the summary page makes clear, if you make estimated payments so that your balance due on the return is no more than $1000 (and each payment was equal or, if unequal, you attached form 2210 to show you properly figured each payment), you are not going to be subject to the estimated tax penalty (which in reality is an interest charge).

 

[Bali Hai Again]

Since there can be all different kinds of outcomes, the best thing to do is read and understand the rules for the estimated payments that are explained in great detail in IRS Publication 505. (Though the 2024 publication is not out yet; it should be available by sometime next month. There have been no major changes to the rules, however, just some number changes to to inflation adjustments) and more briefly on the IRS page on Estimated Payments. In your example, you'd be fine. The IRS computer assumes income is earned equally throughout the year and thus expects to see four equal payments. As I stated before, and as the summary page makes clear, if you make estimated payments so that your balance due on the return is no more than $1000 (and each payment was equal or, if unequal, you attached form 2210 to show you properly figured each payment), you are not going to be subject to the estimated tax penalty (which in reality is an interest charge).

Please see above bold. I have been reading as you suggested and trying to understand the rules for estimated tax payments (a little at a time to keep my sanity). I have been hung up on the $1000 that you refer to.

Below is from the IRS website:

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.

I believe this means that IF you owe 100k in taxes, make equal quarterly payments of $22,500 on time, you have met the requirement of 90% tax owed for the year. The outstanding balance is 20k, obviously more than 1k, and, you avoid a penalty.

Am I correct?

 

[LdiJ]

Please see above bold. I have been reading as you suggested and trying to understand the rules for estimated tax payments (a little at a time to keep my sanity). I have been hung up on the $1000 that you refer to.

Below is from the IRS website:

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.

I believe this means that IF you owe 100k in taxes, make equal quarterly payments of $22,500 on time, you have met the requirement of 90% tax owed for the year. The outstanding balance is 20k, obviously more than 1k, and, you avoid a penalty.

Am I correct?

No, because 20k is 20% of 100k, not 10%. However, the $22,500 you mentioned does add up to 90k, leaving the balance due at 10K, which would make you correct if the 20k you mentioned was a typo and you really meant 10k.

 

[Bali Hai Again]

No, because 20k is 20% of 100k, not 10%. However, the $22,500 you mentioned does add up to 90k, leaving the balance due at 10K, which would make you correct if the 20k you mentioned was a typo and you really meant 10k.

Yes I meant 10k and not 20k. Good catch and thank you for responding.

I feel I’m now armed with the knowledge to comply efficiently with future taxes.

 

[Taxing Matters]

I feel I’m now armed with the knowledge to comply efficiently with future taxes.

As the phrase used by some public service ad says "Knowledge is Power".

 

[quincy]

As the phrase used by some public service ad says "Knowledge is Power".

Francis Bacon, Meditationes Sacrae, 1597.

 

[Bali Hai Again]

“Knowledge isn’t power until it’s applied.”

- Someone Famous

 

[quincy]

“Knowledge isn’t power until it’s applied.”

- Someone Famous

Someone famous = Dale Carnegie.

 

[Taxing Matters]

Francis Bacon, Meditationes Sacrae, 1597.

I figured that the PSA didn't originate it, but didn't know who did. So I just mentioned the PSA used it to be on the safe side. Thanks for digging out who apparently did originate it. A fascinating bit of history.

 

[rodriguezs0804]

In order to avoid underpayment penalties, the IRS typically requires taxpayers to pay at least 90% of their tax liability for the current year or 100% of their tax liability from the previous year, whichever is smaller. You may be liable to underpayment penalties if, after filing your return in February, you discover that you owe $999 and you haven't made the necessary payments through quarterly estimated taxes.
Nonetheless, you may be able to reduce or even completely avoid underpayment penalties if you settle the remaining $999 by the April tax filing deadline.