Suppose my taxable income is bumped substantially by an event in the
4th quarter (e.g., I take a capital gain, I convert some Regular IRA assets to Roth in some year other than 2010), the impact of which could be to double (or greater) the amount of income tax due for the year.
While my 4th quarter estimated tax payment will be based on this additional income, can there be a penalty for underpayment of estimated tax for quarters 1, 2, and 3? On the one hand, I can't be expected to pay estimated tax on income that I had no way of reasonably anticipating, but on the other, I don't see on any tax form any provision for showing when, during the year, I received the income.
Stan K wrote in news:ff283f92-6d8f-4a0b-8534- snipped-for-privacy@i25g2000yqm.googlegroups.com:
That's why there's different "safe harbor" options on how to compute and pay your required estimated payments. The option you are looking for is the Annualized Income method found on the form 2210 schedule AI. But there may be other options that might provide advantge to you.
The reason it's called estimated tax is because you will estimate your tax. Suppose you expect to make 14k in W2 income and 1k in qualified dividends every quarter, and additionally 100k conversion income in the last quarter. You could just calculate your tax, using W2 income as 14k*4, qualified dividends as 4k, conversion income as 100k. You can calculate your state tax first. For example, for CA multiply the tax by 27% to get the Q1 payment. The state tax you estimate to pay will become an itemized deduction for federal, but if you make the last payment on 1/15 of the following year, then that payment will not be allowed as an itemized deduction for this year.
Or you can use the exact method. This method is tedious because you have to track your interest, dividends, qualified dividends, stock sales, etc each quarter.
The Q1 tax is based on income earned in that quarter. Suppose you make 14k in W2 income and 1k in qualified dividends for Q1. When Q1 is finished (March 30), annualize your income by multiplying by 4 to get 60k, of which 4k is qualified dividends. Annualize your itemized deductions too. Calculate the tax, choosing the standard or itemized deduction, and add any credits to your tax return. Multiply the result by 22.5% to get the minimum estimated payment. The ratios are different for different states, like for Q1 in CA you multiply by
27%. Only for the Q4 return, you have additional income of 100k.
Anyway, you wouldn't make an equal amount every quarter because the first quarter is 3 months, the second is 2 months, etc.
Stan, if you have made timely quarterly estimated tax payments each of which equaled at least 1/4 of your prior year tax liability, you will have no penalty for underpayment of estimated taxes even if your current year tax liability is substantially greater than the prior year. Of course, you will have to pay the difference by April 15 of the following year to avoid a late payment penalty.
If your AGI in the prior year was more than $150,000, you must pay at least 110% of your prior year tax liability (rather than 100%) in quarterly installments to avoid penalty for underpayment of estimated taxes.
If you do not meet the "prior year tax" exception to the penalty, perhaps because your prior year tax was much greater than you expected your current year tax to be, you may be able to avoid or minimize the penalty by using an annualized method to calculate it. This is especially effective when the unplanned income arrives late in the year. Schedule AI and Part IV of Form 2210 is used to calculate the penalty using the annualized income method. You can access the form and instructions at
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and calculate your possible penalty by running the numbers through the form.
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