Is there a gotcha to Federal Estimated Taxes and Safe Harbor?

[neil4tt]

I understand basically how Safe Harbor rule applies to high income cases, which is that if you pay at least 110% of your previous years taxes, then there are no penalties when you pay the full remaining amount due at filing time before April 15th. But, if you were to take an extreme case, where let us say your Previous Year Tax was $50K, and you paid estimated taxes of $55K (four equal quarters), but due to a one-time event your Current Year Tax due was much much higher (say 5x higher!  which can happen due to many reasons such as property sale, lottery, estate windfalls, IRA conversions etc.), so you had $250K+ due. Does that mean that if one pays the remaining amount of ~$200K, there is no penalty as one has met safe harbor? If one knows that is the case, can people not invest that delta of $200K in a CD or something and earn a reasonable amount of interest by meeting the safe harbor? I am trying to figure out if there is actually a catch and safe harbor does not suffice for Federal.  Thanks!

[Mike9241 · Accepted solution]

the safe harbor is the safe harbor. so if you have withheld and/or pay timely the quarterly estimates for 2024 equal  to 110% of your 2023 tax (what this amount is is a little involved. see form 2210 instructions for how last year's tax for penalty purposes is computed)  but if you meet this test you could owe millions without penalty even though 2023s tax was only $5. Be careful with estimates. If they post late because you mailed them then you have the penalties. Best to use IRS Direct Pay. if you don't have it established do it early.  With direct Pay you provide certain info and specify the date it's to come out of your account. if the date is timely and the info correct even if the IRS takes the money out after the safe date you specified, you're safe. You must have funds available in the account on the date you specify.

https://www.irs.gov/payments/direct-pay 

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The problem for some taxpayers is that they have a hard time not spending those millions so they can't pay come 4/15. Then the penalties kick in. Some decide not to file or file late but that's a 5% penalty for the unpaid balance for each month filed late with a maximum of 5 months after that is .5% a month on the unpaid balance until paid in full. There is interest charged on the unpaid balance. If the iRS worries about getting paid they can put liens on everything you own, levy any paychecks and certain other sources of income. Even seize certain assets like bank accounts. 

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while bank CDs are generally safe, what if the bank fails and you can't get your money out on 4/15. 

Even US securities might be at risk for a period if a budget isn't passed.