The quarterly tax club: new member, expensive lesson

[Purslane]

Got a letter from the IRS yesterday saying they owe me $100 because I overpaid the $800 penalty for underpaying my 2024 taxes. I would never have known about paying this penalty if the IRS hadn't sent me a letter. How many years have I been paying this and not even knowing it??
My guess is probably 2 since that's when I decided to get my head out of the sand and get serious about getting FI (too late for RE).

It never occurred to me to pay quarterly taxes. Apparently it never occurred to the accountant to tell me about it either. I know I need to get serious about learning about taxes. One thing at a time.

I thought quarterly taxes were for business owners, not people who got a W2. I knew I had big tax bills the last few years but I budgeted for it and thought that was that.

I sent the first 2025 quarterly payment to the IRS yesterday. I am still trying to wrap my head around how I am supposed to estimate and pay my taxes to within $1000 of what will be owed. I just paid 1/4th of what was due for 2024, like most people. I don't have a crystal ball. If this year is like last year it could be enough. Or not. And I will have to pay another penalty, but much, much smaller.

Now I need figure out if I have been paying a penalty for underpayment of state taxes too.

 

[COcheesehead]

If you have to take an RMD, a withdrawal at the end of the year with withholding is viewed by the IRS as having occurred throughout the year. So as long as your withholding = safe harbor, you will not be penalized or have to make quarterly estimated payments.

 

[HFWR]

I avoided the quarterly filings by having tax taken out of my withdrawals and my SS. Might lose some, but it’s worth not dealing with it more than once a year.

 

[cathy63]

Your accountant has likely been including Form 2210 with your tax return. You can ask him not to include it and let the IRS bill you for the penalty. It's no more expensive to do it that way, since it stops accumulating on the date that the IRS gets your payment. The accountant probably figured you'd pay on April 15th and you paid early saving yourself $100 of the penalty.

Also, you don't have to get within $1000 of what you owe. You can adjust your withholding to be 110% of last year's tax (typically the amount on line 24 of your 2024 1040). The easiest way to do that is to take
((Line 24 x 1.1) - Line 33) / (# of pay periods left in the year). Enter that amount on Line 4c of a new W-4 and turn it in to your employer.

 

[Purslane]

If you have to take an RMD, a withdrawal at the end of the year with withholding is viewed by the IRS as having occurred throughout the year. So as long as your withholding = safe harbor, you will not be penalized or have to make quarterly estimated payments.

Not time for RMD yet. This is for plain old dividends and interest. I just wish I didn't have to learn these lessons the hard way.

 

[audreyh1]

We started paying quarterly estimated taxes even before I retired because our investments started to generate enough taxable income that regular withholding wasn’t enough. Fortunately DH was on top of it.

First step is to learn the safe harbor rules. The easiest one is based on prior year taxes. Then you don’t have to worry about penalties.

DF’s tax person always told him want he should pay in quarterly estimated taxes as part of his annual tax computations.

 

[Purslane]

Your accountant has likely been including Form 2210 with your tax return. You can ask him not to include it and let the IRS bill you for the penalty. It's no more expensive to do it that way, since it stops accumulating on the date that the IRS gets your payment. The accountant probably figured you'd pay on April 15th and you paid early saving yourself $100 of the penalty.

Also, you don't have to get within $1000 of what you owe. You can adjust your withholding to be 110% of last year's tax (typically the amount on line 24 of your 2024 1040). The easiest way to do that is to take
((Line 24 x 1.1) - Line 33) / (# of pay periods left in the year). Enter that amount on Line 4c of a new W-4 and turn it in to your employer.

Am I going to have do something similar for California state tax?

 

[Purslane]

We started paying quarterly estimated taxes even before I retired because our investments started to generate enough taxable income that regular withholding wasn’t enough. Fortunately DH was on top of it.

First step is to learn the safe harbor rules. The easiest one is based on prior year taxes. Then you don’t have to worry about penalties.

DF’s tax person always told him want he should pay in quarterly estimated taxes as part of his annual tax computations.

My tax prep person should have told me too. But it is my money, so my fault. This is how I learn.
And this forum

 

[audreyh1]

My tax prep person should have told me too. But it is my money, so my fault. This is how I learn.
And this forum

Yes they should have told you, explained the rules, etc.

 

[TickTock]

So as long as your withholding = safe harbor, you will not be penalized or have to make quarterly estimated payments.

This is the key. IIRC, OP is still doing W-2 wage w*rk. So you can adjust your withholding. Also, IIRC, your AGI is >=150k. The federal safe harbor rule to avoid penalties is the lower of (1) 90% of tax for the current year or, (2) 110% of tax shown for the previous year.

California likely has some version of this; I'm not sure.

So to avoid penalties, adjust your withholding. And after retirement, make sure your quarterly estimated payments meet the safe harbor limit.

 

[dmpi]

Turbo tax will tell you the quarterly payments required for the following year. For me April is the toughest month. Both IRS and property tax is due.

 

[cathy63]

Am I going to have do something similar for California state tax?

Yes, you need to withhold 110% of the amount on Line 35 of your 540. Put whatever additional withholding you need on a CA DE-4 Line 2.

 

[surprising]

Turbo tax will tell you the quarterly payments required for the following year. For me April is the toughest month. Both IRS and property tax is due.

How does this work for the newly retired? Last year I had big taxes. This year I will have very small taxes (living off cash, dividends, some LTCG). I estimate around $4K in federal, so I plan to just do $1K/qtr.

 

[TickTock]

With such a big drop in taxes, I suggest making a reasonable estimated overpayment to avoid penalties. For example, if you have stock mutual funds then the dividend distributions and capital gains distributions can be difficult to closely estimate.

Or you could go with your best estimate, see how it turns out, and pay penalty if you underpaid.

 

[Purslane]

Turbo tax will tell you the quarterly payments required for the following year. For me April is the toughest month. Both IRS and property tax is due.

My year is divided into Oh My God and Thank God.
For 6 months I spend every single penny I earn. For the next 6 months I try not to.
I have not purchased turbo tax because I have been paying people to do my taxes. I have got to learn how to do this myself.

 

[Purslane]

Yes, you need to withhold 110% of the amount on Line 35 of your 540. Put whatever additional withholding you need on a CA DE-4 Line 2.

Thank you.

 

[audreyh1]

How does this work for the newly retired? Last year I had big taxes. This year I will have very small taxes (living off cash, dividends, some LTCG). I estimate around $4K in federal, so I plan to just do $1K/qtr.

Yes, in that case you need to make a good effort at determining your retired year taxes and pay enough to meet 90% of total that is owed.

 

[COcheesehead]

I run the 1040 estimater at dinkytown.com a couple times a year to eliminate surprises.

 

[ransil]

How does this work for the newly retired? Last year I had big taxes. This year I will have very small taxes (living off cash, dividends, some LTCG). I estimate around $4K in federal, so I plan to just do $1K/qtr.

I had this happen and just paid it, 12k return the next year.
still trying to find a balance getting better,

 

[Jerry1]

As others have said, first order of business is to understand safe harbor. Take that amount and divide it by 4 and make your quarterly estimates. Don’t forget to consider the amount you are having withheld (assuming you have W-2 wages) so you don’t over pay your estimates.

If your income is lumpy and cash is tight, you can pay in amounts that match your income but that adds a bit of complexity to the issue. Let us know if that’s the case and we can elaborate. Otherwise, the equal payments along with your withholding is the simplest way to proceed.

 

[eniacpalm]

"I sent the first 2025 quarterly payment to the IRS yesterday. I am still trying to wrap my head around how I am supposed to estimate and pay my taxes to within $1000 of what will be owed. I just paid 1/4th of what was due for 2024, like most people. I don't have a crystal ball. If this year is like last year it could be enough. Or not. And I will have to pay another penalty, but much, much smaller."

I use a spreadsheet and update it if I make any unscheduled withdrawals from my IRA (or receive unexpected income). I calculate what my yearly taxes are based on my income (pension & SS - soon to be RMD's) using the current years tax table. I can then send in a quarterly amount based on what may have changed and make sure I remain under the $1000 due for the year.

 

[cathy63]

I use a spreadsheet and update it if I make any unscheduled withdrawals from my IRA (or receive unexpected income). I calculate what my yearly taxes are based on my income (pension & SS - soon to be RMD's) using the current years tax table. I can then send in a quarterly amount based on what may have changed and make sure I remain under the $1000 due for the year.

This strategy doesn't actually eliminate the penalty though. If your four quarterly payments are not equal then you are subject to the underpayment penalty even if you owe less than $1K in April (you can still owe the underpayment penalty even if you get a refund).

If the IRS chooses to assess the penalty you would have to fill out Form 2210 Schedule AI to prove to them that your income was lumpy and you actually did pay in a timely fashion.

Since OP has a job and can increase withholding, adjusting that is usually an easier way to reach the safe harbor.

 

[walkinwood]

For reference

Underpayment of estimated tax by individuals penalty | Internal Revenue Service

The Underpayment of Estimated Tax by Individuals Penalty applies to individuals, estates and trusts if you don't pay enough estimated tax on your income or you pay it late. The penalty may apply even if we owe you a refund.

www.irs.gov

The safe harbor statement

Avoid a penalty​

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%.

 

[surprising]

For reference

Underpayment of estimated tax by individuals penalty | Internal Revenue Service

The Underpayment of Estimated Tax by Individuals Penalty applies to individuals, estates and trusts if you don't pay enough estimated tax on your income or you pay it late. The penalty may apply even if we owe you a refund.

www.irs.gov

The safe harbor statement

Well, last year I paid $70K in federal taxes. No sorry, I am not paying that this year to satisfy Safe Harbor, since I anticipate significant reduction to around $4K based on my income. I probably will overpay a little this first year in retirement to avoid penalty though.

 

[cathy63]

For reference

Underpayment of estimated tax by individuals penalty | Internal Revenue Service

The Underpayment of Estimated Tax by Individuals Penalty applies to individuals, estates and trusts if you don't pay enough estimated tax on your income or you pay it late. The penalty may apply even if we owe you a refund.

www.irs.gov

The safe harbor statement

Key words there are "may avoid". E.g. you will not avoid the penalty if you pay all but $1K of your prior year's tax by making an estimated payment on January 15th.

Form 2210 gives you the exact calculations for the safe harbors. If you look at that form, you'll see that quarterly estimates are not used in Part I at all. It only looks at whether your withholding exceed the 90% or 100%(110%) thresholds.

When you get into Part III, if you meet the thresholds by having four equal quarterly payments or by having payments that decrease in size as the year progresses, that will also exempt you from the penalty. If you have larger quarterly payments after smaller quarterly payments, then you can still owe a penalty even if you do meet the threshold overall. In that case, you have to fill out Schedule AI to show that the timing of your income matches the size of your payments.