0

Please consider the following hypothetical situation. A person is retired and his sole source of income is his investments in the stock market. In tax year 2022, he has a total tax liability of $100 dollars. He paid $500 dollars of estimated payments. He files his 2022 tax return and tells the IRS to apply his refund to his 2023 tax.

In 2023 he does not make any estimated tax payments and has a total tax liability of $10,000 for tax year 2023. Will he be hit with a penalty for not paying enough tax in 2023?

I believe the answer is yes and this person should have made estimated tax payments in 2023. Am I right?

2 Answers 2

3

I want to make a few clarifying assumptions because you've included 3 tax years - 2022, 2023, and 2024, and you've also stated two different tax liabilities for 2023.

  • $100 is the 2022 (not 2023) tax liability for the return filed in 2023.
  • The $400 2022 refund is applied to 2023 taxes (not 2024).
  • $10,000 is the 2023 tax liability for the return filed in 2024.

You would use IRS Form 2210 to calculate any underpayment of estimated tax and underwithholding.

The "required annual payment" to avoid an underpayment penalty is calculated as the lower of:

  • 90% of the current year's tax
  • 100% (110% if AGI > $150,000, or $75,000 if MFS) of the prior year's tax

In this scenario, you'd find that the "required annual payment" would be $100 ($110 if that year's AGI was higher than $150,000, or $75,000 if Married Filing Separately) in Part 1 of Form 2210.

Since you effectively paid $400 towards the current year's taxes through your prior year's overpayment, there will be no underpayment penalty in the current year. However, if the overpayment had instead been refunded instead of applied to the next tax year, you would have an underpayment penalty on $100. You can run the calculations yourself on Form 2210, but the penalty would probably be less than $5 based on current IRS interest rates.

1
  • your assumptions are correct about the question. I have fixed the question.
    – Bob
    Apr 9 at 3:04
-1

Yes, that is correct. Of course the interest/penalty may be small enough that it isn't worth worrying about. Also check the "safe haven" rules.

0

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .