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I had a financial windfall in 2018, pre-paid taxes to account for this, and ended up getting a refund. Turbotax included several 1040-ES forms for paying estimated taxes for 2019, I assume based on my withholding and other income from 2018. I'm not expecting a similar windfall this year. Assuming I have the correct withholding, do I have to pay estimated taxes, only to get a refund? These seem to be the relevant instructions from Turbotax:

If you expect to owe more than $1,000 in 2019, you may incur underpayment penalties if you do not make these four estimated tax payments.

  • You never have to pay estimated taxes or file Forms 1040-ES in the sense that the IRS will not send a demand notice "Hey, we notice that you forgot to file Form 1040-ES for this quarter and baed on all the information we have, we are assessing you $X. Pay up!" the way they ultimately will for failure to file Form 1040, but of course you may incur underpayment penalties. – Dilip Sarwate Mar 18 at 13:06
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Paying estimated taxes avoids an underpayment penalty, so to determine whether or not you need to pay estimated taxes, you need to look at what triggers the penalty.

An IRS article on Estimated Taxes states this:

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

This spells out three criteria, and meeting any of these will avoid the penalty. First, if you do your 2019 tax return next year and find that you owe less than $1000 or you owe less than 10% of your total tax with your return, you will not owe a penalty. However, if you aren't sure what your total tax will be for 2019, you can ensure that you won't owe the underpayment penalty by making sure that your tax payments before your 2019 return equal at least what your total tax was for 2018 (or at least 110% of 2018's total tax, for high income earners).

Publication 505 has more details about the estimated tax requirements, including this helpful flow chart:

Do you have to pay estimated tax?

If you find that you might be subject to the underpayment penalty next year unless you pay more during the year, you can avoid sending in estimated taxes if you are employed by simply requesting that your employer withhold more tax from your paycheck by filling out a new W-4 form.

  • So if I withhold at least 90% of my 2019 taxes (or owe less than $1000), regardless of whether or not I pay estimated taxes, there won't be a penalty? – user83547 Mar 18 at 4:51
  • @user83547 Yes, that is correct. – Ben Miller - Reinstate Monica Mar 18 at 4:54
  • I wonder if the 1040-ES forms generated by Turbotax were based on estimates for the prior year. – user83547 Mar 18 at 5:28
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Turbo tax triggered the 1040ES because they have no idea if 2018 was the new normal, or if it was never to be repeated.

From IRS PUB 505

General Rule

In most cases, you must pay estimated tax for 2019 if both of the following apply.

  1. You expect to owe at least $1,000 in tax for 2019, after subtracting your withholding and refundable credits.

  2. You expect your withholding and refundable credits to be less than the smaller of:

    a. 90% of the tax to be shown on your 2019 tax return, or

    b. 100% of the tax shown on your 2018 tax return. Your 2018 tax return must cover all 12 months.

Higher Income Taxpayers

If your AGI for 2018 was more than $150,000 ($75,000 if your filing status for 2019 is married filing a separate return), substitute 110% for 100% in (2b) under General Rule

There are multiple ways to get to the safe harbors, so a taxpayer can avoid the underpayment penalty next April.

Some get there by adjusting their W-4, others get there by having taxes withheld from non-employment income where that option exists, others make estimated payments.

For my situation I have felt that in most years the 100% of the previous years tax was the easiest for me to make mathematically. I can know I am going to reach the threshold. The one time it resulted in a huge potential refund was the year after a large underpayment when I sold rental property. That next year if I used the 100% rule I would have had to grossly over-withhold in order to make the safe harbor. So I went with the 90% rule and hoped there was no December surprise.

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