Comments on: Estimated Taxes and Avoiding Underpayment Penalties

By: Jim

Jim — Wed, 11 Feb 2009 22:01:18 +0000

Reading all this has me worried. In 2008 I collected unemployment, Social Security, a small pension, and I withdrew money from an IRA. None of which had withholding tax taken out. My wife works but has tax withheld. Will I be hit with a penalty for not filing and paying quarterly?

By: nickel

nickel — Mon, 22 Sep 2008 18:13:50 +0000

Melanie: You’re supposed to re-do the calculations every quarter, so if you have a bunch of money come in at the end of the year, then it will result in a larger than normal Q4 payment. I’m no tax pro, but from what you described, you should be okay.

By: Melanie

Melanie — Mon, 22 Sep 2008 17:38:45 +0000

I made a guess as to how much I was going to make this year and calculated my quarterly estimated taxes based on that.

Things have been going well and it looks like I”m going to make 1/3 more than I guessed. In fact, all this extra money is coming in the 4th quarter.

Do I simply include the taxes from all my extra earnings in my final quarterly payment? (So the 4 payments won’t be equal anymore)

Thanks,

Melanie

By: nickel

nickel — Sat, 23 Aug 2008 13:36:02 +0000

Correct, you only need to withhold as much this year as your total tax bill from last year. That’s for federal. Different states might be different. So if you make a lot more this year than last year, you can set extra aside in an high yield savings account and then just make a big payment when you file your taxes. As for (b), I believe you are correct there, as well. It sounds like you’re talking about paying more than the minimum required to avoid a penalty, so there shouldn’t be any problems.

By: friendofjohn

friendofjohn — Sat, 23 Aug 2008 06:25:38 +0000

So– sorry this question is a bit dense, but I want to make sure i am doing this right.

“In general terms, you’ll be subject to an underpayment penalty unless the total of your annual withholding and credits exceeds:

(1) 90% of the total tax owed for the year in question, or
(2) 100% of the tax shown on your previous year’s tax return”

As an example of #2:

John withholds only $400 in 2008.

John makes $50K in 2008 and owes much more in taxes, which he did not prepay.

But in his 2007 Tax Return he owed only $400 for the year (since that year his income was low).

a) Is it correct that John will not be penalized in 2008 for not paying estimated taxes?

b) Can John prepay some estimated taxes anyway, even though he was not required to and did not make all quarterly payments?

Thanks!

By: nickel

nickel — Fri, 20 Apr 2007 12:26:47 +0000

Yeah, I’m not sure how that’s a good thing. I mean, unexpected tax savings that allow for a refund is great, but intentionally overpaying just to get a ‘windfall’ is something else entirely.

By: Blain Reinkensmeyer

Blain Reinkensmeyer — Tue, 17 Apr 2007 22:23:52 +0000

I think it is worth noting that if you overpay your pre-determined taxes at the end of the year you can get a decent sized refund.

I did that with overpaying by nearly $4,000 and got a huge kickback check after filing my taxes. What sucked though was that I was paying money out throughout the year that I could have grown other ways. bad beat!

By: CPA1298

CPA1298 — Tue, 17 Apr 2007 18:33:16 +0000

There’s plenty of opportunity for arbitraging the difference between the required payments and the total tax.

For 2006, I owed $3,700 federal, with no penalties/interest (I put the check in the mail today). For 2007, I will owe $12,000, with no penalties/interest.

For some people, though, the ’sticker shock’ of making a huge payment on April 15th is too much to bear, and they prefer to have more withheld. For me, I’d prefer to have the $12,000 earning interest for me, not Uncle Sam.