Higher Q4 Income and Estimated Taxes

[kaneohe]

I know there are some who are in this situation. Assume you can't use previous yr safe harbor because last yr was a high income yr. If you were trying to meet 90% of this yr taxes as safe harbor and then Q4 was higher than you expected............is there a simple rule of thumb to figure out what to pay in Q4. First 3 quarters payments were equal and likely ? ahead for that period because income is normally higher in Q4. I am wondering if shooting for 90% of annual taxes total est. taxes and subtracting out Q1-Q3 payments would get me close since I'm probably ahead for the first 3 quarters.

 

[audreyh1]

I think you just have to estimate your taxes as best you can, then pay 90% of what you estimate you owe less the prior three quarter estimated tax payments on Jan 15.

And file form 2210 if your first three quarter payments are less then 1/4 of what you end up owing for the year. So you’ll probably have to estimate your income and taxes owed for the prior three quarters when you file your final taxes. The tax software should be able to do most of the calcs once you have the quarterly income info.

 

[kaneohe]

Thanks, audrey..............I know you have lots of experience so I was hoping you'd answer. What is your experience using your rule of thumb in paragraph 1.......
if I estimate the full yrs tax, then pay 90% less the prior 3 qtrs of estimated tax,
does the 2210 confirm that you owe no penalty? I was actually planning on paying 95% less the prior 3 qtrs for a bit of safety.

I'm the tax software in my case and the software got lazy. I actually tried a dry run on the 2210 but that form reminds me of the QDIV/CG wksht....each step is easy but easy to make 1 mistake and mess the whole thing up. I thought it would be easier this yr........only have to worry about income timing.....don't have to worry about deductions or AMT..........but even just the income timing if you want to do it carefully is a bit of a chore.

Anyway.......very interested in your experience w/ your rule of thumb. Based on the crude run on the 2210, looks like the first 3 quarters are overpaid so that's why I was thinking 90% of the final taxes w/ the Q4 estimate would be ok.

 

[pb4uski]

I would do as best an estimate that I could of the total tax for 2018... Then pay that less previous estimated payments and withholdings... Make that 4Q estimated payment by Jan 15, 2019.

IMO it's not worth fiddling with that 10% haircut since you'll have to pay it in 3 months anyway when you file your return.

 

[audreyh1]

Thanks, audrey..............I know you have lots of experience so I was hoping you'd answer. What is your experience using your rule of thumb in paragraph 1.......
if I estimate the full yrs tax, then pay 90% less the prior 3 qtrs of estimated tax,
does the 2210 confirm that you owe no penalty? I was actually planning on paying 95% less the prior 3 qtrs for a bit of safety.

I'm the tax software in my case and the software got lazy. I actually tried a dry run on the 2210 but that form reminds me of the QDIV/CG wksht....each step is easy but easy to make 1 mistake and mess the whole thing up. I thought it would be easier this yr........only have to worry about income timing.....don't have to worry about deductions or AMT..........but even just the income timing if you want to do it carefully is a bit of a chore.

Anyway.......very interested in your experience w/ your rule of thumb. Based on the crude run on the 2210, looks like the first 3 quarters are overpaid so that's why I was thinking 90% of the final taxes w/ the Q4 estimate would be ok.

I would say that if you overpaid estimated taxes according to your YTD income each quarter using the annualized method which is what 2210 does, then you should not owe any penalty as long as you pay 90% of what you owe for 2018 by Jan 15 2019. I've done that before. I don't see how it could be otherwise.

I guess the deal with the annualized income method is that you total your income YTD for each IRS quarter (March, May, August), then you annualize your income by multiplying by 4, 2.4, and 1.5 for each of these three quarters, and then compute the tax due on that amount. That is the test for whether adequate estimated tax was paid for each quarter.

The trick is accurately estimating your taxes. I usually don't have the full picture of what is the qualified dividends total, nor additional dividend income due to foreign tax paid nor the foreign tax numbers. So I do err a bit on the conservative side - often using prior year numbers as a guesstimate.

 

[Animorph]

And it's quite likely you will have to calculate your taxes for each quarter separately in order to avoid a penalty for paying extra in the fourth quarter. Though the penalty might be small enough that it's not worth the extra time.

 

[audreyh1]

Yes, using the annualized income method you do indeed calculate your taxes YTD for each tax quarter. And these taxes are calculated on your annualized income, where you take your income YTD for each and multiply it by a factor, then calculate the taxes.