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I have a question about tax penalties and interest

Suppose my total tax due was 30,000 last year, and all of that was due to employment.

Suppose this year I expect to have about the same 30,000 taxes due from employment, and an additional 50,000 taxes due to long term capital gains for positions sold this year.

If I pay 33,000 in taxes during this year, through a combination of payroll deductions and estimated tax payments, then I will owe 47,000 when I file next year (approximately, of course)

True or False — since I paid 33,000 in taxes this year before 12/31 (110% of last years 30,000 total taxes due) then the 47,000 I owe and I pay when I file next year will NOT incur a penalty nor interest?

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    From the IRS (irs.gov/taxtopics/tc306): "Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of 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." But check irs.gov/payments/… and run the numbers.
    – Jon Custer
    Aug 22, 2023 at 13:23

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Suppose this year I expect to have about the same 30,000 taxes due from employment, and an additional 50,000 taxes due to long term capital gains for positions sold this year.

If I pay 33,000 in taxes during this year, through a combination of payroll deductions and estimated tax payments, then I will owe 47,000 when I file next year (approximately, of course)

The 110% rule is used when trying to reach the IRS safe harbor.

General Rule

In most cases, you must pay estimated tax for 2023 if both of the following apply.

  1. You expect to owe at least $1,000 in tax for 2023 after subtracting your withholding and tax credits.

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

  • 90% of the tax to be shown on your 2023 tax return, or

  • 100% of the tax shown on your 2022 tax return. Your 2022 tax return must cover all 12 months.

Note. The percentages in (2a) or (2b) just listed may be different if you are a farmer, fisherman, or higher income taxpayer. See Special Rules, later.

Higher Income Taxpayers

If your AGI for 2022 was more than $150,000 ($75,000 if your filing status for 2023 is married filing a separate return), substitute 110% for 100% in (2b) under General Rule, earlier.

For 2022, AGI is the amount shown on Form 1040 or 1040-SR, line 11.

I have used this rule several times in the past. In one case I knew I would owe capital gains tax after selling my condo. Instead of trying to estimate what the tax would be, I just made sure I reached the 110% level.

If you do this by adjusting the W-4 to have extra funds withheld, you can make the 33K goal.

Note: this doesn't address state taxes.

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  • Hmm, I guess I am a bit confused then seem like I have 2 choices (1) increase withholdings so that an additional 3k is withheld between now an 12/31 or( 2) leave withholdings alone, which are sufficient to result in 30K being withheld over all pay periods, and make a 3K estimated tax payment in Q3 Why would the previous two choices be different, meaning why would one work and the other would not work (or are they both insufficient to prevent penalties)? Aug 22, 2023 at 19:02
  • Either one would work. I have found in my case the W-4 adjustment was easier for me. Aug 22, 2023 at 19:17
  • @JulesYasuna: the minimum payment (either 90% of this-year tax or the safe-harbor 100/110/other% of prior-year tax) must be paid in equal quarters. For the first case IF your income is 'bursty' (e.g. the cap gains occurred in Q3) by doing a lot of extra work you can use Schedule AI to delay the required payments, but that doesn't apply to the second case (safe-harbor). Withholding is treated as paid in equal quarters and thus timely regardles of its actual payment (even in Dec.) but estimated payments use the actual payment date so a Q3 payment is late for Q1 and Q2 and incurs ... Aug 23, 2023 at 6:38
  • ... effectively 5 and 2 months interest at the lagging Treasury bill rate plus 3%: $3k/4*(7%*7/12) ~ $31. So it's better to go with withholding if possible. Aug 23, 2023 at 6:38

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