Do I need to make added estimated Fed Tax payments in 2019 because of unusually increased income? I retire in 13 days, and will get a monthly severance for 14 months, on the 25th of each month, with normal withholding from it, as if the only income. My pension will start 8/1 on the first of each month, with taxes withheld as if IT was the only income. Plus I will get a severance incentive, paid for unused vacation, bonus, etc. Wife gets pensions plus SS with no taxes withheld. Basically, until Sept, I will not really know what my exact total Fed taxes will be via Taxcaster, though I made a decent estimate. Are the circumstances and income differential increase compared to last year, (about $60k or 30%) enough to not worry about a penalty for the larger tax bill in April 2020, or am I required to make estimated payments last quarter or 2019? If I don’t HAVE to make payments in 2019, I am ok with the large tax bill in 2020.
Penalty for not enough withholding due to severance?
- Thread starter Perryinva
- Start date
If you pay via withholding 100% of last yrs taxes (110% if AGI>150K) by end of yr, you should be ok via the previous yr safe harbor.
https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
"Penalty for Underpayment of Estimated Tax
If you didn’t pay enough tax throughout the year...... through withholding ........, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they ......... paid at least .................... 100% of the tax shown on the return for the prior year, .................. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information."
You should be able to adjust your withholding to meet this which would be the simplest. You can also do by paying estimated taxes but it is a somewhat ugly thing to do come tax time.
https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
"Penalty for Underpayment of Estimated Tax
If you didn’t pay enough tax throughout the year...... through withholding ........, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they ......... paid at least .................... 100% of the tax shown on the return for the prior year, .................. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information."
You should be able to adjust your withholding to meet this which would be the simplest. You can also do by paying estimated taxes but it is a somewhat ugly thing to do come tax time.
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Souschef
Thinks s/he gets paid by the post
I underestimated last year by about 4K, and the penalty was $9. No big deal. It was not even worth filling out a Form 2210.
Do you understand how that was calculated? The simple-minded way is to take that underpayment at the interest rate charged......this yr, it is 5% so guessing last yr was 4%. 4% of 4K is $160. Because the payments are due
"quarterly" during the yr, the actual amount is derated to 2/3 or so of that amount so I would have guessed $106 or so.
Perhaps you mean that you were short 4K of the total amount for that yr?
A penalty of that amount suggests that you were short of safe harbor by 333.....either 100(110)% of previous yr tax or 90% of current yr. Perhaps previous yr tax was lower?
Souschef
Thinks s/he gets paid by the post
My previous year was lower, in fact i got a refund. I am sure that is the case, I was just short of safe harbor.
Thanks.....just wanted to make sure OP got the right message. The penalty
is not terrible but it's not necessarily negligible either.......maybe about 3-4%
of the shortfall from safe harbor.
copyright1997reloaded
Thinks s/he gets paid by the post
There were some exceptions to underpayment penalties for 2018 due to the tax law changes: https://www.irs.gov/newsroom/irs-waives-penalty-for-many-whose-tax-withholding-and-estimated-tax-payments-fell-short-in-2018
I only remembered this because I was a beneficiary of the exception (i.e. would have had a penalty but it was waived).
Winemaker
Thinks s/he gets paid by the post
Our pensions, 401k withdrawals, royalty income are all subject to federal withholding. My rental income, which I control to a certain extent, is not, so therefore is variable. I pay $6-12 a year in federal penalties. My state does not tax any retirement income, but does tax rental income. But, if I keep my net rental income below $13,000, then I qualify for income tax forgiveness.
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