Safe Harbor Calculation with Large Tax Credit

[TrvlBug]

This is probably a stupid question, but...

I pay our estimated taxes with the RMD I have scheduled for the end of the year. Most of the RMDs are withdrawn early January. I am trying to determine without success, if a large tax credit impacts the calculation of the safe harbor rule for the following year. My philosophy is to write the IRS the largest check possible in April!!!

Our federal taxes are in the $40K-$50K range. This year (the 2023 calendar year) they will be at the low end due to tax loss harvesting carryforward as well as an $18K tax credit for installation of a solar system. So instead of calculating the safe harbor for 2024 on 110% of $40K, I plan to calculate it on 110% of $22K. Is this correct or will I get hit with a large penalty? I searched on IRS.gov as well as google w/o success and am hoping for a definitive answer from the great minds here .

 

[TheWizard]

I think you are computing incorrectly.
It's 110% of last year's taxes, regardless...

 

[TrvlBug]

I think you are computing incorrectly.
It's 110% of last year's taxes, regardless...

I don't believe so. I estimate our taxes for 2023 to be about $40K before the $18K tax credit with $22K total taxes due for the 2023 calendar year. I am calculating the safe harbor needed to pay estimated taxes for the 2024 tax year. I'll recheck my wording.

 

[audreyh1]

If your taxes are going to be lower for the year due to the last quarter I suggest you switch to what you think your taxes are going to be for the year and meet the requirement to pay at least 90% of the total owed by Jan 15. Assuming you’ve already paid estimated taxes you can skip or pay a lower amount Jan 15.

 

[TrvlBug]

If your taxes are going to be lower for the year due to the last quarter I suggest you switch to what you think your taxes are going to be for the year and meet the requirement to pay at least 90% of the total owed by Jan 15. Assuming you’ve already paid estimated taxes you can skip or pay a lower amount Jan 15.

I don't mind writing the IRS a $20K+ check so really want to calculate the safe harbor amount based on 110% of 2023 taxes rather than 90% of anticipated 2024 taxes.

A couple of years ago when I did a large ROTH conversion, I did not pay the estimated tax that year, but rather sent the IRS/state $80K the following April. My CPA gets really annoyed at me .

 

[audreyh1]

This is for 2024?

Yes, just use 110% of 2023 taxes in 4 equal installments and pay the remainder on April 15, 2025. It doesn’t matter how much larger, you are safe.

 

[TrvlBug]

The 2023 estimated taxes have been handled via my November RMD, so no worries there. In fact, I overestimated taxes due for 2023 as I wasn't sure the final payment for the solar system would occur in 2023 (it was) or January 2024.

 

[TrvlBug]

This is for 2024?

Yes, just use 110% of 2023 taxes in 4 equal installments and pay the remainder on April 15, 2025. It doesn’t matter how much larger, you are safe.

Yes, for 2024 taxes. my question is should the 110% be calculated on the net taxes due after the $18K solar tax credit has been applied? Logically, to me, the answer is yes, but I don't trust the gov't not to have a gotcha in its rules!

My estimated taxes are always paid at the end of the year via RMD withholding.

 

[audreyh1]

The 110% is based on the total taxes owed for 2023, so yes, it will include any credits.

Line 24 1040 I believe.

 

[TrvlBug]

The 110% is based on the total taxes owed for 2023, so yes, it will include any credits.

Line 24 1040 I believe.

Thank you.

 

[SecondCor521]

The 110% is based on the total taxes owed for 2023, so yes, it will include any credits.

Line 24 1040 I believe.

The complete rule is more complicated and can be found here:

https://www.irs.gov/publications/p505#en_US_2023_publink1000194632

It's essentially line 24 minus certain taxes and minus certain refundable credits, so using line 24 will work but in certain circumstances a taxpayer can hit the safe harbors at a lower amount if the above complicated rule helps their situation.

(The refundable credits mentioned in the more complicated version are mostly below line 24.)

ETA: I'm not sure if the solar credit OP mentions is included here or not. OP would need to check.