Question regarding estimated tax payments

[mellynlee]

I want to verify that I am calculating my estimated tax payments correctly. I originally tried to use the TurboTax (online) version to do this for me, but found it way too complicated. My main objective is to avoid the underpayment tax penalty (which we owed for the last 2 years - 21 and 22).

I believe we will have a higher AGI this year than last year, so I am going to assume we can just pay 110% of last year's taxes owed, in order to avoid the penalty.

This is how I'm figuring it out:

I multiply last year's tax owed (1040, line 24) by 110% to get an amount owed next year. 

Call this number X.

I have our 3/31/23 paycheck stub. From this, I look at the YTD Federal Income Tax withheld, and I multiply this number by 4. (I'm assuming it will be about the same each quarter, AND I do NOT have to include the Employee Medicare and SS Employee Tax amounts??) Call this number Y.

Now, X - Y = amount I have "underpaid"

I take this amount and divide it by 4, and then I can pay this amount as my estimated tax payments each quarter.

If I do this, then we will avoid the underpayment penalty next year. EVEN if we end up selling stock, and will owe taxes on that stock, we still won't have an underpayment penalty.

Is this correct, or am I missing something else?

[AliciaP1]

Medicare and Social Security taxes do not impact your Income taxes (either Federal or State).  Only your Federal Income Tax withholding affects your Federal tax liability and State Income Tax withholdings impact your State tax liability.

To calculate a good estimate for 2023 you can use 110% of your 2022 total tax liability on line 24, less any anticipated credit amounts from lines 27-29, less your anticipated W2 withholding amounts.  Divide the result by 4 and you have an amount to submit each quarter on form 1040ES.

[fanfare]

you may use the 100% of prior year's tax rule  (110% if AGI is over $150,000) or

the 90% of this year's tax rule,  to avoid penalty.

Form 2210 requires equal quarterly payments. See Line 11.

your W-4 is already spreading withholding evenly

you must make the remaining estimated tax payment quarterly

since you definitely know the prior year's tax if you filed on time,

but not necessarily your current year's tax,

the first rule is the surest route to reach 25% each quarter..

April 18th is the due date for the first 2023 estimated tax installment.

@mellynlee 

[mellynlee]

Hello,

Thank you for your reply.

I am going to use 110% of my 2022 tax to calculate my estimated taxes for this year and not try to estimate 2023 taxes at all.

Question: Do all 4 estimated taxes need to be exactly the same?

What is the best way for me to calculate these payments?

Do I need to calculate tax owed on 3/31, 5/31, 8/31 and 12/31? Since these are not equal time periods, should the payments be equal?

[HopeS]

See responses below:

1st Question: No, you do not need to make all 4 estimates the same. You can prepare quarterly estimated tax calculations to make each payment.

2nd Question: it depends on your situation and your source of income. If your main source is W-2 wages, you should follow up with your payroll to make sure they are withholding correctly.

3rd Question: No your payments do not have to be the same.

See additional information in the link below:

Calculation of Federal Estimated Taxes

@mellynlee