I'll owe taxes in April for tax year 2015, should I send in payments now?

The safe harbor rule is that your withholdings this year have to be higher than your total tax for last year (not just your withholding), or

If you don't think you'll achieve that, you should either make estimated tax payments or increase your withholding.

You should also be aware that the Underpayment of Estimated Tax penalty is not really a penalty, it is just a late payment interest charge, applied to the cumulative excess underpayment as of four dates during the year (Mar 31, May 31, Aug 31, and Dec 31). (I am describing the Annualized Income method as documented in IRS form and pub instructions). There is a short-cut calculation available if you make 4 equal estimated payments by the respective due dates (4/15, 6/15, 9/15,

The current annual interest rate is 3%, so if you can get a better return on your money by investing it, and paying 3% annual rate to "borrow" from the IRS, there is no good reason to make estimated payments.

Agreed. And regardless of interest rates, I've come to view the so-called "penalty" as more of a "convenience fee" for the convenience of not having to deal with the estimated tax rules or the inevitable problems resulting from payments or refunds that are misapplied, etc. Makes life MUCH simpler! :-)

MTW

The misapplied story.....

Having returned to CA, I had to file a part-year CA return for 2014. Part-year returns use the same form that non-residents use. I always have to send estimated tax payments to avoid the 3% charge. CA does not allow you to use a prior year taxes unless it is a full tax year. so my estimated payments for 2015 would be based on 2015 taxes. CA also demands 3 payments of 30%, 30% and 40%. Using Taxwise software, I scheduled my debit to pay 2014 taxes and I scheduled my three 2015 estimated tax payments. On 4/15/15, I logged into my bank to see if the two debits took place. There were 4 debits: The debit to pay 2014 and all 3 of the 2015 estimated tax payments. It turns out that the 2014 CA nonresident only Taxwise software has a bug. If you use the 2015 540-ES to calculate your payments or if you just enter the data directly, Taxwise goes and uses the current tax year for the annual date. In other words, it scheduled my payments for 4/15/14, 6/15/14 and 1/15/15. As all of the dates were in the past, CA FTB just took the whole amount out of account. They did apply the payments to 2015.

I will add, that if one actually looks at the 3 vouchers, one can see the 2014 scheduled date and that date can be over written. But who ever think to look when you are scheduling 2015 payments on the 2015 form.

Federal makes no real difference. State will affect which year the payment is deductible in. Might make no difference to you, but it might.

Oh, let's not forget the AMT. That is my current concern re state estimated taxes - if your income is going up, and you pay a lot of taxes with your April 15 return and a bunch of higher estimates for the next year, the IRS may require you to pay an AMT due to the high state tax deductions vs. your annual income.

So I try to estimate very closely in December and pay all the state taxes due for the year to avoid the federal AMT in the following year.

Thanks. My withholding this year should be higher than the total tax last year.

Does that mean I would not be subject to the 3% interest penalty?

Now for tax year 2016, I will have a problem. Because I expect my income to be much lower that year and as a result, my tax withholding won't be as much as the prior year tax and it also won't cover the 2016 taxes (because withholding on bonuses is 28%, but my tax rate is much higher).

What can I do to plan ahead for 2016?

This is not an issue for state taxes as I usually get a refund...somehow the withholding on bonuses for state tax works out OK.

As regards earning more than 3% on the money...I can't find an investment that would return 5+% guaranteed in order to generate a 3% after tax return! Right now, the money I would use to pay taxes are sitting in an account earning < 1%.

Right. "safe harbor" means there's no penalty.

There's one more safe harbor rule: If you owe less than $1,000, there's no penalty.

See

Reduce your allowances (W-4 line 5). If reducing that to 0 isn't enough, have your employer withhold an additional amount with each paycheck (W-4 line 6).

Or you can file quarterly estimated taxes.

Ira Smilovits

It's already 0, and doesn't work because the withholding rate for bonuses is a flat 28% regardless of the what the actual marginal tax rate is based on income. So I would have to use the second option. I think I will wait till the bonuses pay out (early in the year), try and figure out what I will owe, and adjust the w-4 at that point.

If you are not using estimated payments but instead adjusting the W-4 does the $1000 safe harbor apply?

Yes, precisely that's the point he was making. The $1,000 safe harbor ONLY applies if you are not making estimated payments.

Pub 505 mentions it in the section on determining whether you need to make estimated payments. If you expect to owe less than $1,000, you don't need to make estimated payments.