Tax Penalty in 2021?

[mystang52]

DW got a one-time taxable windfall this past January 22. Using an online tax estimator, it appears that we will owe $2500 above and beyond what was withheld. We have automatic withholding for our pensions and S.S., and but for the windfall those withholdings would be very close to our tax obligation.
If I just wait until 2021, and indeed owe $2500, will there be a penalty and would it be substantial? Believe it or not I cannot find a straight answer in Google searching.

 

[Souschef]

There are a number of ways to handle it. You can file a form 2210 asking that the penalty be removed as it was a one time event.
Or, look up "safe harbor" withholding. If you have enough withheld to cover your 2019 taxes, there is no penalty.

 

[statsman]

If it is determined there will be a penalty, is there any chance you can increase the withholding on the pension for the remainder of the year? It appears SS has a limit as to how much can be withheld.

 

[Gumby]

Or you could draw from a tIRA and have it all withheld in an amount sufficient to cover the tax on the windfall. Assume you are in the 22% bracket and you need to cover $2500 in taxes. You would withdraw $2500/(1-0.22) = $3205 and have all of it withheld by the trustee of your tIRA. That would be $705 to pay the tax on the tIRA withdrawal and $2500 to meet your current tax deficit due to the windfall. You may need to add a little to the withdrawal to cover any state taxes. The methodology is the same, except you put the combined state and federal marginal rate where I have put 0.22. So, for me, I would put 0.28, because I'm in the 22% federal bracket and the 6% state bracket.

 

[corn18]

DW got a one-time taxable windfall this past January 22. Using an online tax estimator, it appears that we will owe $2500 above and beyond what was withheld. We have automatic withholding for our pensions and S.S., and but for the windfall those withholdings would be very close to our tax obligation.
If I just wait until 2021, and indeed owe $2500, will there be a penalty and would it be substantial? Believe it or not I cannot find a straight answer in Google searching.

Safe harbor will likely apply:

Current year safe harbor: If the estimated taxes you pay turn out to be at least 90% of your final bill for 2020 and you made payments on time, no penalties will apply.

Prior year safe harbor: If you use your 2019 tax bill as a barometer for your 2020 liability, you are likewise sure to be penalty-free as long as the taxes you pay are at least 100% of your 2019 bill. However, if your adjusted gross income for 2019 was more than $150,000 ($75,000 for those who are married filing separately), the 2020 payments must be at least 110% of the 2019 bill. It should be noted that different rules apply to farmers and fishermen.

If you don't meet either of these, then the penalty is minimal. It's around 2.6% annualized and you only pay for part of the year.

 

[kaneohe]

Check out the safe harbors mentioned previously. If you will withhold
1) 100% of last yrs taxes (for the whole yr) (110% if AGI>150K) or
2) 90% of this yrs taxes,
you have a safe harbor and there will be no penalty if you don't withhold more.

https://fairmark.com/?s=safe+harbor

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