Estimated Quarterly Payments

[MAJ]

I am trying to figure out how much to send in for my quarterly payments for the 2025 tax year.  I expect everything to be the same as my 2024 taxes except that I will have $185,000 of long-term capital gains for 2025.  I did an  experiment with my 2024 file (Turbo Tax desk top file) and TT came up with about $37,000 for federal taxes.  But it printed out the four vouchers for quarterly estimated payments with total up to about $41,000.  So, the question is which number to go with for my quarterly payments, the $37,000 or $41,000?  Why is it different?

[Mike9241]

there are 2 general rules to avoid penalties for not making timely payments towards your 2025 tax by having sufficient withholding and making timely estimated tax payments

1. they must equal 100% of your 2024 tax. 110% if your 2024 adjusted gross income was $150K or more OR

2. they must equal 90% of your 2025 tax. 

we can't see what Turbotax did 

the first rule, if met, always works regardless of actual taxes for the next year. however, in your situation with a large capital gain, you would end up owing a significant balance come 4/15/2026. 

[baldietax]

when you say TT printed out vouchers for 41k was that generated when you did your actual 2024 return, or when you did the experiment return for your 2025 numbers?

when you did your actual 2024 return, by default TT will use the "100% of 2024 tax" (110% if AGI > 150k) and assumes your 2025 withholding is the same as 2024 (so if using those amounts check the withholding assumptions if applicable).  You can also then go thru "Other Tax Situations / Form W4 and Estimated Taxes" and give it 2025 estimates, in case 90% of 2025 tax is lower.

If you are looking at ES vouchers from your experimenting including the 2025 cap gain entered as tho it was 2024, it's generating vouchers for 2025 probably based on 110% of the experimental tax which was entered as tho it was 2024, as presumably your AGI will be > 150k in this case.  That's probably why the vouchers say 41k but the tax is 37k.  The tax from your experiment is a good benchmark for your final return (bear in mind some deduction limits or tax tables will be different for 2025), but ignore ES vouchers generated by that experiment.

In your situation if you expect a significant income event in 2025, you can pay ES based on 100/110% of your 2024 tax which should be significantly lower (and check withholding in that calculation).  You will owe the balance in April 2026, but you can earn 4% interest in the meantime.  It also won't matter how much the 2025 income is or when it occurs, as long as you are paying ES quarterly based on 2024 you are protected.

If you didn't make Q1 ES or underpaid, make sure to catch it up in Q2 by paying 50% of the total ES by Q2.  You will still have a penalty for Q1 but it will stop the penalty accruing for more than a few months.

[baldietax]

P.S. when you file 2025 next year you are going to see those same high vouchers by default TT will generate ES for 2026 for 110% of your 2025 tax.  When that happens you can go thru Other Tax Situations / Form W4 and Estimated Taxes to provide 2026 information and reset the ES calculations back to the lower "90% of 2026 tax".  Ultimately you can also just ignore ES vouchers from TT (and vouchers in general, pay electronically at irs.gov) if you have better offline estimate.

In desktop in Forms mode there is a form "Est Tax Options" which shows the details.  Also in Forms mode you can double click on Form 1040 line 38 penalty and double click again in the worksheet to show the Form 2210 penalty calcs, so you can also experiment with different ES payments to confirm how the penalty is calculated.

[MAJ]

Thanks for the reply. Since my Federal tax was way less than $4000 and my AGI was way less than 150,009, and my experimental tax for 2025 (calculated with TT version for 2024) is $37,036, I could probably get away with 90% of $37,036. The $41,740 estimated payments is exactly 110% of $37,036. You would think that TT suggest 90% of 37,036.

Oddly enough, California has the same rule (90% of estimated current year, or 110% of prior year) and the vouchers total only 90% of current year estimate. Very strange!  I should probably use the calculated tax for Fed and CA.

[MAJ]

Thanks for the reply. Since my Federal tax was way less than $4000 and my AGI was way less than 150,009, and my experimental tax for 2025 (calculated with TT version for 2024) is $37,036, I could probably get away with 90% of $37,036. The $41,740 estimated payments is exactly 110% of $37,036. You would think that TT suggest 90% of 37,036.

Oddly enough, California has the same rule (90% of estimated current year, or 110% of prior year) and the vouchers total only 90% of current year estimate. Very strange!  I should use the calculated tax for both Fed and state.  

Thanks for the heads up about preventing TT from using experimental data next year.

[baldietax]

just to clarify, what do you mean "my Federal tax was way less than $4000" was that your 2024 tax?  What voucher amounts did TT generate when you did your 2024 filing (not the experimental version)?

[MAJ]

My 2024 taxes were $3955. (not "way less" than 4000) and TT printed four payment vouchers of $1,036.

[baldietax]

Perfect - that's what you need to pay for ES!  (sounds like you don't have withholding in the mix).  If you didn't pay in Q1 then pay 2 x that = $2072 in Q2 (by 6/16) and you will have a little penalty on the missed $1036 from Q1 for a few months probably about $20.  (Personally I like to round up ES to whole 50/100s).  Then put the remaining $33k you owe aside in a T-bill or something and earn 4% on it til April '26...

In your original 2024 return in Forms mode go to Est Tax Options to see the calculation (not sure why it's 1036 if your tax was 3955 but check this form to see why).  If you didn't input 2025 estimate in Other Tax Situations / Form W4 and Estimated Tax that won't show up in the safe harbor calculation but that's ok as you know it will be 37k and 90% of that will be way larger than 100% of your 2024 tax.

Back to your experiment version for 2025 in TT "2024"... you can validate these ES payments will work for you...

• In Other Tax Situations / Underpayment Penalty, update the "2023" AGI/tax information to be your 2024 figures ($4k), depending how you set up the return if you carried over a return or started from scratch but either way you need to get your 2024 info in there as "2023" for the correct penalty calculations.
• If you don't input any ES payments, you should see a penalty on Form 1040 line 38.  In Forms mode, double click line 38 then double click again in the worksheet to show the Form 2210 calculations which don't normally show up in forms mode for some reason.  In Lines 1-9, this should show that your "2023" (=2024) tax was $4k, your "2024" (=2025) tax was $37k and do this safe harbor calculation that you should have paid ES only for $4k and calculate a penalty on that, I would guess about $160 without ES payments.
• Now input your projected 2025 ES payments in Deductions & Credits / Estimated Tax and Other Taxes Paid (using 2024 dates).  You should see that the penalty on line 38 goes down I think to about $20, if you set up without a Q1 payment and 50% in Q2.  Play round with the ES - input higher ES amounts and you should see that paying more ES has no effect on the penalty.
• Again in your experiment version, ignore the "2025" ES vouchers generated.  Keep thinking 1 year ahead - these represent what TT will do by default next year for your 2026 ES payments, it will calculate 110% of prior year tax until you input your 2026 income information (and you can do this too - go to Other Tax Situations / Form W4 and Estimated Payments, where it asks for "2025" income information put in some estimates for 2026, and you should see the ES vouchers reset to 90% of that).

Not a CPA but I think you are in good shape following the original ES voucher amounts from your original filing, you are always "safe" if you pay ES based on prior year tax, often it can be an overpayment but this is one of those times when it works to your advantage (you could win the lottery next week and still only owe $4k in ES til April 2026).  Good use of TT to run your estimate for 2025 and recommend using that to satisfy yourself that these ES payments will minimize your penalty.