My 2023 paycheck tax witholdings (both Federal and State) will very likely exceed 110% of my 2022 tax amounts.
If so, I understand that there will NO risk for any tax underpayment fee when i file my 2023 tax return next year, even though i have some additional investement income spread monthly through the 2023 (mostly from bank interest). So, no need to pay nany estimate tax this year! correct?
Also, in the unlike case that my 2023 W2 income withholdings (excluding payroll tax) end up a bit short of the 110% amounts, can we still avoid underpayment tax penalty, by just making later (once I know this in mid December) a Q4 estimate tax payment that would take my total 2023 tax payments above these amounts? ... it or would be too late by then given that some of my non-paycheck income (e.g. interest payments) occurred early in 2023, in which case i need to dig into the details of the Oct. 16 payment deadline... (Note that my 2023 income will not exceed the $1M. So, safe harbor would still apply to me)...
Thanks!
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Q. If so, I understand that there will NO risk for any tax underpayment fee when I file my 2023 tax return next year, even though I have some additional investment income spread monthly through the 2023. So, no need to pay any estimate tax this year! correct?
A. Correct
Q. Also, in the unlikely case that my 2023 W2 income withholdings (excluding payroll tax) end up a bit short of the 110% amounts, can we still avoid underpayment tax penalty, by just making later a Q4 estimate tax payment that would take my total 2023 tax payments above these amounts?
A. No. Quarterly payments must align, somewhat, with the quarterly income. But, being a "bit short" will result in a low penalty. The penalty is calculated on the shortfall from 110% of the 2022 amount, not the 2023 income/tax.
Q. If so, I understand that there will NO risk for any tax underpayment fee when I file my 2023 tax return next year, even though I have some additional investment income spread monthly through the 2023. So, no need to pay any estimate tax this year! correct?
A. Correct
Q. Also, in the unlikely case that my 2023 W2 income withholdings (excluding payroll tax) end up a bit short of the 110% amounts, can we still avoid underpayment tax penalty, by just making later a Q4 estimate tax payment that would take my total 2023 tax payments above these amounts?
A. No. Quarterly payments must align, somewhat, with the quarterly income. But, being a "bit short" will result in a low penalty. The penalty is calculated on the shortfall from 110% of the 2022 amount, not the 2023 income/tax.
Instead of making an estimated payment to make up the difference you could just have more withheld from your paycheck ... let the employer know what you need by filling in a new W-4 form and put the amount on line 4c... just make sure you undo that change next year.
The rationale for @Critter-3 's suggestion is that the IRS treats withholding as timely (withheld evenly for the year), regardless of when actually paid. Estimated payments are only credited to the time period paid, when calculating the underpayment penalty.
Thank you both for the very useful (and timely) replies!
Just one last clarification: if i choose to pay estimate tax on Oct. 16, which ends up being an overpayemnt, then I understand that IRS will actually provide me a refund which will actually include an overpayment interest, correct?
Specifically, I understand the overpayment interest i will get from IRS will be the federal short-term rate plus 3 percentage points, i.e. currently around 8.5%. Is this also correct?
Thanks again!
Q. If I choose to pay estimated tax on Oct. 16, which ends up being an overpayment, then I understand that IRS will actually provide me a refund which will actually include an overpayment interest, correct?
A. No. There is no interest paid on refunds from the original tax return filing.
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