It depends on how the lump-sum payments impact your taxable income in 2020 and the tax on that additional taxable income.
There are basically two ways to figure how much of the lump-sum payment will be included in your 2020 taxable income:
- Based on your current years income; or,
- By electing to calculate how much of the lump sum for prior years would have been taxed if it had been received in that prior year.
So, using one of those two methods, you must calculate how much of the lump sum is taxable in 2020. Then, using the tax rate for the tax bracket in which those "last dollars of income" will be taxed, calculate how much additional tax you will owe. If you won't otherwise have enough tax withholding to "cover" that additional tax, you'll need to make an estimated tax payment to avoid underpayment penalties.
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