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I am trying to figure out how to estimate quarterly tax payments. After some wonderful help on this forum, it seems I'll need to do this for my state, but not for the federal government.

From what I understand, estimated adjusted gross income requires that I include estimates for dividends and capital gains. How do I do this when filling out quarterly tax estimates since I don't know those values in advance? Those values tend to fluctuate a lot. Should I just use my expected wages for my estimated AGI and leave the rest out?

Also, for tax to be withheld, how, again, do I estimate those values? I can do so for my own wages, but my wife is on an income (not salaried) so her pay varies. (She might have a salaried job later in the year, but we don't know yet.) Should we overestimate our expected AGI and underestimate our expected withholdings when filing jointly? Is there any penalty for doing so i.e. erring on the side of caution?

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    You may want to specify what state you're in. I don't know how much the rules vary by state, but they definitely do vary. May 31, 2023 at 20:18

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The keyword is "estimated". You're estimating. It's not a precise number, it's not your actual tax liability. As was mentioned in the other answers, there are safe harbors that allow you to avoid penalty if you get it wrong, so as long as you hit them you'll be OK. I strongly advise you to go through the IRS Publication 505.

Capital gains and dividends are most definitely included in the AGI, but they're not entirely unpredictable. Usually, dividends are consistent. When you invest in funds or established companies, that pay regular dividends - you can estimate the payouts because they're more or less the same. Similarly to capital gains - if you're regularly rebalancing, you can estimate what your gains would be. If you have a stable portfolio in some mix of funds that you don't touch - you can estimate what your gains would be ($0).

You can estimate your wife's income based on past experience, or... Just adjust your quarterly payments accordingly when the income changes.

There's no penalty for overestimating, you'll just get a refund once you submit your annual tax return. But keep in mind that refund basically means interest-free loan to the government. The goal is to try and find the balance where you neither have a large refund nor a large payment come tax day.

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    Mutual funds pay out capital gains distributions from their internal sales. These tend to be hardest to predict. But they usually only pay them out once or twice per year, and you get the distribution before the deadline for paying estimated taxes for that quarter.
    – Barmar
    May 31, 2023 at 15:18
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How do I do this when filling out quarterly tax estimates since I don't know those values in advance?

You can still guarantee you won't have an underpayment penalty, without knowing your income in advance, by paying either of the following amounts in estimated taxes:

  • For each quarter, pay 1/4 of 100% (or 110% for high earners) of your tax liability for last year, or
  • Use the "annualized income" method, which bases your estimated taxes up to a given quarter only on the income up to that quarter. Basically, you take your income in the 1st quarter, scale it up to the whole year (i.e. divide by 3/12), calculate the tax on that, multiply by 90% * 1/4, that's the estimated taxes that needs to be paid for the first quarter. Then you take your income in the first 2 quarters, scale it up to the whole year (i.e. divide by 5/12), calculate the tax on that, multiply by 90% * 2/4, that's the estimated taxes that needs to be paid for the first 2 quarters. And so on. Since each quarter's estimated tax deadline is 15 days past the end of the quarter, you will already know the income up to that quarter by then. You will need to complete Form 2210 Schedule AI when you file your taxes to verify that you have no penalty.

Sorry, the above is for federal taxes. State taxes are usually similar, but may have some differences, e.g. for California taxes with AGI above $1 million, you cannot use the 100% / 110% of last year safe harbor; in that case, the only guaranteed option is to use annualized income for this year. Also, Form 2210 is the federal form for underpayment penalty; you will need to look for the analogous state form for underpayment penalty.

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    Note that the question is about state taxes, and the asker has failed to specify their state. As far as I know, what you say is true federally; but for example, in California there is an income threshold (a very high one) above which the safe harbor of 110% last year's income retroactively disappears. May 31, 2023 at 20:18
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You seem to be of the belief that each quarter, you have to pay one fourth of what your total tax liability will be for that year. That is not the case. You just have to pay taxes on what you earned that quarter. So if you earn $60k the last quarter of the year, and $20k the other three quarters, then the first quarter's payment is tax on $20k, not on $30k. What you will earn later in the year can affect things like tax bracket, whether credits get phased out, AMT, etc., but for the most part, you don't need to worry about it.

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