Estimated taxes

[fisemper]

I have been pretty fortunate in the past two months of making nice gains on stocks. As of now, I plan to pay up about 12.4K of estimated taxes and leave about 800 once I file, if I make no other gains or losses for the year. My problem is why should I pay before the quarterly deadline when I don't know if I will have any losses for the year? I plan to pay in Dec but can I avoid any penalty for not paying early. Seems like a BS situation since I can't charge interest on refunds owed to me.

 

[audreyh1]

I will do the annualized income method this year. That’s the best method to use when you don’t know what your taxable income will be and you suspect you could owe considerably less than prior year’s taxes. I expect our income to be lower.

 

[kaneohe]

I have been pretty fortunate in the past two months of making nice gains on stocks. As of now, I plan to pay up about 12.4K of estimated taxes and leave about 800 once I file, if I make no other gains or losses for the year. My problem is why should I pay before the quarterly deadline when I don't know if I will have any losses for the year? I plan to pay in Dec but can I avoid any penalty for not paying early. Seems like a BS situation since I can't charge interest on refunds owed to me.

if you think you have a pretty good idea on this yrs income (except for losses), you could figure your taxes for the yr (w/o) losses and pay 25% each quarter.

 

[fisemper]

So sounds like as long as I am close I should be able to avoid penalties? I don't care if I need to pay, just don't want to pay unnecessary. I'll have to look more into the annualized income method since I am clueless on that. Thanks!

 

[Rambler]

Schwab has an income estimator, which we will use to pay our estimated taxes. While it is inefficient, since we like to travel, I usually pay the full year estimated taxes in April, and go away until the next April. By doing so, I eliminate forgotten quarterly payments and associated penalties. If I overpay, I just roll it into the following year’s estimated liability. Our taxes aren’t finalized yet because our tax service shut down for a while...they’re back to work now and I’ll be done on Monday or Tuesday.

 

[fisemper]

Schwab has an income estimator, which we will use to pay our estimated taxes. While it is inefficient, since we like to travel, I usually pay the full year estimated taxes in April, and go away until the next April. By doing so, I eliminate forgotten quarterly payments and associated penalties. If I overpay, I just roll it into the following year’s estimated liability. Our taxes aren’t finalized yet because our tax service shut down for a while...they’re back to work now and I’ll be done on Monday or Tuesday.

I assume then for 2020 you are paying all upfront by the new July deadline? I see how that can that make sense.

 

[audreyh1]

If you use eftps.gov to pay your taxes you can schedule multiple estimated tax payments in advance. This works particularly well when you are doing the 4 equal payments based on prior year taxes.

 

[PaunchyPirate]

Last year, I made 3 equal estimated tax payments based on my best guess I settled on in April. But then in December, I sold a lot of stock that wasn't originally planned for. I then made a large estimated tax payment in December to cover what I thought would be due. In order to avoid a significant penalty, I used the Annualized Income (AI) method when I filed taxes. It's easy to do if you use TurboTax (and I assume other self-filing software). However, even with TurboTax, I had to build a spreadsheet that itemized every single income transaction for the year (every stock sale, dividend/interest payment, etc.). Not hard to do from bank/brokerage statements. You then sum up the income into the buckets that the IRS needs for the AI method. Pay special attention to the months that fall in each category, it's not simply 3 months to each quarter. Once I understood what was needed, it was quite easy to generate the numbers needed. The AI method saved me hundreds of dollars in penalty. I no longer fear doing it again if needed.

 

[pb4uski]

I have been pretty fortunate in the past two months of making nice gains on stocks. As of now, I plan to pay up about 12.4K of estimated taxes and leave about 800 once I file, if I make no other gains or losses for the year. My problem is why should I pay before the quarterly deadline when I don't know if I will have any losses for the year? I plan to pay in Dec but can I avoid any penalty for not paying early. Seems like a BS situation since I can't charge interest on refunds owed to me.

Would 100% of your 2019 tax be less than $12.4k?

• 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.

 

[rk911]

can’t you also avoid a penalty by paying 100% of the previous year’s tax bill? that’s what we do. 100% / 4. i do round up to the next $100.

 

[Souschef]

I used "what if" on Turbotax, taking into account the lower RMD for this year. I already had taken some and it was too late to put it back.
I reduced my Estimated taxes and plugged it into EFTPS in 4 equal payments.

 

[Toocold]

My income has been very erratic, so I had to create my own spreadsheet to figure out how much taxes I would need to pay.

I called the state and asked them why I couldn't pay 0,0,0, total amount due, and they really didn't give me a good answer to that. I chose to pay my best guess quarterly payments anyways to keep my life simple.

 

[VFK57]

I usually use last year Turbo Tax or HR Block software to input approximate income for the current year but with different name like Probe or 2020 estimate. Based on a Tax due amount, generated by software after all possible income input, I pay quarterly 1040 ES and CA 540ES Taxes installments.

 

[pb4uski]

My income has been very erratic, so I had to create my own spreadsheet to figure out how much taxes I would need to pay.

I called the state and asked them why I couldn't pay 0,0,0, total amount due, and they really didn't give me a good answer to that. I chose to pay my best guess quarterly payments anyways to keep my life simple.

My state would assess underpayment penalties and interest. So let's say that you owed $10k and paid $0, $0, $0 and $10k. They would assume that you owed $2.5k a quarter so were underpaid $2.5k, $5.0k, $7.5k and $0... so broadly speaking you would owe then 9 months interest on $2.5k, 6 months interest on $2.5k, 3 months interest on $2.5k... so at 5% for easy figuring that would be ~$190.

However, if you could file a form that demonstrates that based on your YTD income you actually owed $0, $0, $0 and $10k then the underpayment penalties and interest would be waived.

 

[audreyh1]

can’t you also avoid a penalty by paying 100% of the previous year’s tax bill? that’s what we do. 100% / 4. i do round up to the next $100.

In our case we have some years where the taxable income drops significantly from a prior year, and we don't want to overpay taxes.

If your income varies little from year to year, then using the safe harbor 100% prior years taxes, or 110% if prior year income was over $150K MFJ, is a super simple approach.

In our case if we use the annualized income method for paying estimated taxes, we general pay very little during the year, and a large amount Jan 15 of the following year. That's because >>75% of our income is received in Q4.

We us Quicken to track all our transactions and income, so it's very easy for me to generate income reports for all the federal tax quarters.

Don't have to worry about paying estimated state taxes, thank goodness.

 

[OldShooter]

... I called the state and asked them why I couldn't pay 0,0,0, total amount due ...

Actually you can do this for both the state and the feds IF you pay from an IRA. In December of each year we pay the safe harbor amount by withdrawing from IRAs and specifying 100% total withholding, divided between state and federal as needed. Withholding is considered paid over the course of the year, so no need to worry about quarterly payments.

I am far too lazy to mess around trying to estimate my taxes. If the safe harbor amount involves a small overpayment, then the gummint gets a few months of an interest-free loan. Not a big deal in this interest rate environment IMO.

 

[pb4uski]

Actually you can do this for both the state and the feds IF you pay from an IRA. In December of each year we pay the safe harbor amount by withdrawing from IRAs and specifying 100% total withholding, divided between state and federal as needed. Withholding is considered paid over the course of the year, so no need to worry about quarterly payments.

I am far too lazy to mess around trying to estimate my taxes. If the safe harbor amount involves a small overpayment, then the gummint gets a few months of an interest-free loan. Not a big deal in this interest rate environment IMO.

AND IF you are over 59 1/2 so you avoid the 10% premature withdrawal penalties.

 

[OldShooter]

AND IF you are over 59 1/2 so you avoid the 10% premature withdrawal penalties.

... always there keeping me honest on the details.

 

[pb4uski]

and obviously since the "estimated taxes" are withdrawals they are included in income and taxed.

 

[Toocold]

My state would assess underpayment penalties and interest. So let's say that you owed $10k and paid $0, $0, $0 and $10k. They would assume that you owed $2.5k a quarter so were underpaid $2.5k, $5.0k, $7.5k and $0... so broadly speaking you would owe then 9 months interest on $2.5k, 6 months interest on $2.5k, 3 months interest on $2.5k... so at 5% for easy figuring that would be ~$190.

I guess it depends on the state or the rep I talked w/ didn't know. She just said try your best.

 

[Retire2013]

can’t you also avoid a penalty by paying 100% of the previous year’s tax bill? that’s what we do. 100% / 4. i do round up to the next $100.

This is what I do also.

 

[fisemper]

Would 100% of your 2019 tax be less than $12.4k?

My 2019 tax was 12.9K before the realized gains, now adding the extra 12.4K.

 

[Fermion]

Will there be a waiver of penalties this year for underpayment of taxes you think?

I had only applied our 2019 refund to our 2020 taxes but now I just made $60,000+ on Stemline stock and will have to pay back all of our ACA subsidy plus a lot of short term gains.

I could really stimulate the economy if I didn't have to send in $$$ in estimated payments this year.

Wait....I was just reading...so if last year we had a refund (only due to the fact that I had made $8,000 in estimated tax payments), we won't owe any penalty this year even if we don't make payments?

 

[audreyh1]

Will there be a waiver of penalties this year for underpayment of taxes you think?

I had only applied our 2019 refund to our 2020 taxes but now I just made $60,000+ on Stemline stock and will have to pay back all of our ACA subsidy plus a lot of short term gains.

I could really stimulate the economy if I didn't have to send in $$$ in estimated payments this year.

Wait....I was just reading...so if last year we had a refund (only due to the fact that I had made $8,000 in estimated tax payments), we won't owe any penalty this year even if we don't make payments?

What was your total tax owed last year? You normally need to at least cover that in 4 equal payments to avoid penalty if current year taxes look to be higher. If you’ve already covered that amount from last years refund you are good.

 

[Golden sunsets]

This is a topic of interest to us. We will elect not to take any RMD's this year which will reduce our state and federal taxes by roughly $30,000. In past years we have always paid 100% of our estimated federal and state taxes in the month of December out of our annual RMD withdrawal and deposited the difference into our brokerage account. We have never withheld from our pension/social security checks during the year, which we liked from a cash flow perspective. Waiting until December each year has enabled us to be very accurate. Our tax return for 2019 showed a tax refund of $4 from the Feds and a payment due of $2 to the state.

So this year will have to be different. Pension and social security income is known and does not fluctuate. We keep a fairly detailed tracker of all other income from dividends and interest from taxable brokerage accounts and bank CD's and savings accounts. I update the tracker as the estimated number becomes real each month and that tracker feeds into our own spreadsheet tool for calculating our taxes. My plan is to make payments of 1/4 of our evolving estimate of taxes when each payment is due (2 in July, 1 in September and 1 in January). We've chosen this method over starting to withhold from the Pensions and Social Security payments, as I think it gives us more control. Does this plan make sense to any of you who are accustomed to estimating?