Hi All,
My income for tax year 2020 was significantly less than prior years. Due to a one-time payment my employer made to me in January 2021, I owe some estimated taxes for Q1 2021. My paystub shows that my federal withholding is more than 110% of the federal tax I have due in tax year 2020. If I understand the rules, I can elect not to send in any estimated tax payments for 2021 and be exempt from any underpayment penalties because my employer withholding already exceeds 110% of the tax in 2020. I will of course settle up when I file but I want to confirm that I will not trigger an underpayment penalty if I choose not to send in estimated tax payments for the rest of the 2021 tax year. Please let me know if I have the correct interpretation.
From Turbotax:
- If your prior year Adjusted Gross Income was $150,000 or less, then you can avoid a penalty if you pay either 90 percent of this year's income tax liability or 100 percent of your income tax liability from last year (dividing what you paid last year into four quarterly payments). This rule helps if you have a big spike in income one year, say, because you sell an investment for a huge gain or win the lottery. If wage withholding for the year equals the amount of tax you owed in the previous year, then you wouldn't need to pay estimated taxes, no matter how much extra tax you owe on your windfall.
- If your prior year's Adjusted Gross Income was greater than $150,000, then you must pay either 90 percent of this year's income tax liability or 110 percent of last year's income tax liability.
