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I have trouble getting my arms around estimated tax payments. Let's assume I have some small steady income but the majority of the income is "lumpy": large one time payments that are hard to predict in timing and amount.

An example: let's say I'm making a base line income of about $40,000. Tax on these is trivial: $1230/year or $310/quarter (assuming rough 2023 numbers and married filing jointly). I have a payment of $260,000 coming up but no idea on whether it hits in the current tax year or the next. If it it comes in the current year, the tax jumps up to $52,000 or $13,000/quarter. If we divvy this up over the quarters proportional to the income I should have paid $1733 in the first three quarters and $46800 in the last.

Let's assume that the sum of all estimated tax payments covers the tax liability and that none of the "safe haven" provisions work here.

Questions:

  1. In the example above: if I only pay $310/quarter, do I have to pay underpayment penalty for the first 3 quarters?
  2. If yes, how is this penalty calculated?
  3. What is a reasonable strategy to avoid the penalty when timing and amount of future payments isn't know at the time?

P.S. This is NOT an academic example. I got snagged by this before when a private company staged a private stock sale event at the end of the year and despite covering my entire tax liability I had to pay underpayment penalty on the earlier quarters (which had proper withholding given the information available at the time).

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  • "despite covering my entire tax liability I had to pay underpayment penalty on the earlier quarters" are you certain this was the case? You should not owe ANY underpayment penalty so long as you don't owe more then $1,000 for the year (or pay 100% of the previous year's tax).
    – D Stanley
    Jan 17 at 15:26
  • @DStanley: I'm very sure, because I actually paid the penalty and even a decent tax professional couldn't find a way to avoid it. At the end of the year I did not owe any tax at all, the penalty was due to the fact that I should have paid higher taxes in the first 3 quarters. Apparently the 4th quarter windfall triggered some phaseout provisions that increased the taxes for first three quarters.
    – Hilmar
    Jan 17 at 20:24
  • Does the base income or any of the income appear on a W2, or is it all on 1099's? Jan 18 at 10:48
  • @mhoran_psprep: only a very small amount is from a W2.
    – Hilmar
    Jan 18 at 17:23
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    This seems to be covered by the annualized installment method which was explained to you in multiple answers last time you asked: money.stackexchange.com/questions/133061/… Can you explain what’s different now?
    – nobody
    Jan 19 at 2:01

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