California income Tax - Estimated Taxes

[taxdean]

Some years ago, California added the requirement to pay 30% of estimated taxes by the Q1 deadline, another 40% by the Q2 deadline, nothing by the Q3 deadline, and the remaining 30% by the Q4 deadline.  It is not clear to me what the penalties might be if, for example, 70% is not paid by that Q2 deadline, even if more than 100% is paid by the Q4 deadline.  Can someone tell me, generally, how that penalty, if any, would be figured?

Also, for my likely situation this year, there is this safe harbor of paying 110% of the prior year's tax and I plan to do that, but am unclear how that interacts with the aforementioned 30%/40%/0%/30% profile that I just noted above.  Does it mean that, for example, as long as I pay 70% of 110% of last years' tax by the Q2 deadline, I should have no penalty even if my 2022 tax bill ends up being even higher (due to a late year decision to do a Roth conversion)?

Thanks much!

[taxdean]

This is me replying to me.  I am facing the June 15th deadline of tomorrow and have received 38 views but no answers.  Can anyone help?  I am less urgently interested in my first paragraph if, indeed, someone can confirm what I suspect might be the case in my second paragraph.   Help, please!

[fanfare]

@taxdean 

You are expected to estimate your 2022 tax and pay 100% of it in installments.

Not 90% of your prior tax.

(In my state, the installments are equally 25%. No Idea why CA uses a strange rule.)

[fanfare]

If you do a Roth Conversion in the fall you have until Jan 15 to calculate the tax.

[taxdean]

I am pretty sure that, for the IRS, you will owe no penalties as long as you pay 100% of your prior year's tax liability and that is some sort of 'safe haven' for those who cannot predict their current years' income until very late in the year (or even by January 15th, I suppose).  I believe that 100% factor rises to 110% if your income (last year's, I assume) exceeds some high threshold, and might even be higher (or inapplicable) if one's income is in the millions.  Perhaps someone who knows IRS tax law can chime in and confirm or correct what I just said.

As I understand it, in that regard, California tax law follows the IRS law, so I believe the same rule applies.  If so, everything was easy until California decided it needed to collect more of the tax liability earlier in the year and added this 30%/40%,0%/30% tax payment profile.   So, my question is how these two provisions interact?  I am hoping that what then happens is that, for example for the 2nd quarter, there will be no California tax penalties as long as one pays 70% of the prior year's state tax liability, or 70% x 110% = 77% of it, if one was in a high tax bracket in the prior year, etc.

[taxdean]

Yes, but if that causes a substantial tax liability, I think you will get hit with penalties because you didn't pay proportionally throughout the year.  As I recall, it is treated as if that income were earned evenly throughout the year.   The problem is that I often don't know how much conversion makes sense until very late in the year, given the large variability in my income from month to month.  So, if a safe haven would protect me, that would be comforting.

While I appreciate the efforts, I don't think either you or the person before you, has answered the question I asked.  I need someone who knows California tax regs.  I was hoping about 10% of you folks lurking might be from California!  Time is running out.  Help, please!

[fanfare]

assume the worst case, and make that estimated payment for 6/15.

You should do it online with CA directly.

If you pay through TurboTax, it might be delayed.

@taxdean 

[fanfare]

You are right about the IRS rules.

I can't comment on CA rules, you can look that up on the Internet.

@taxdean 

[taxdean]

I agree with what you said except that I don't know what you means by the "worst case" - please clarify.  My problem, to begin with, was that I didn't know what the worst-case might be (or, even if I did, didn't want to give them an interest free loan for such a long while); and was hoping that the safe haven amount would be the solution.

[taxdean]

I searched everywhere and could not find anything that discussed how the two interact.  However, now that I am thinking about, perhaps the answer is just by simple analogy to IRS regs.  For the IRS, if you pay the entire, let's say, 110%, of last year's tax liability on January 15th fo the following year,the 4th estimated tax deadline, does that mean that there can be no late payment penalty for not paying as you go (on the three prior estimated tax payment dates)?  If that answer is "no", that you would need to pay 25% of that safe haven amount by each of the four dates, then presumably the answer for California is that you need to have paid 30% by April 15th, 70% by June 15th, and 100% by January 15th, that is of the safe haven amount (and so would have no penalties regardless of how much higher the tax liability for the later year happened to be)?  Does any of what i just argued make sense?

[NCperson]

@taxdean - let's use a more concrete, simple example.  Let's say you do a Roth conversion in April, 2022 for a $300,000 and that is the only income you have for the year.  Let's not worry about any safe harbor based on the prior year's tax liability.

if you wait until January 15, 2023 to make an estimated tax payment - and let's say it's EXACTLY the correct amount to pay the taxes that will be calculated on the tax return. there is going to be a penalty because the IRS would have expected you to pay those taxes quarterly over the course of the year. 

if you make the payment on June 15, 2022- and let's say it's EXACTLY the correct amount to pay the taxes that will be calculated on the tax return in April of 2023.  Again, the IRS would have expected you to pay it quarterly over the course of the year. But in this case, you get credit for paying it early in the year, so the penalty is less than in the paragraph above.

if you make the payment on June 15, 2022- and let's say it's EXACTLY the correct amount to pay the taxes that will be calculated on the tax return in April of 2023.  You fill out form 2210ai and show that the income was all recognized in 2Q and that is the same quarter that you made the estimated payment.  There would be no penalty.  In this case, you get credit for paying it in the same quarter as the income occured. 

[taxdean]

That IS what I suspected and, yes, I have been through the worksheets after Turbo Tax assigned a penalty that allowed me to detail the timing of some income, which reduced the penalty.  No one has answered my question exactly, but I am now led to believe that with regard to the state of California, I can pay the same 110% of last year's tax liability by Jan of 2023 and, if I pay that per the 30%/40%/0%/30% California schedule, I should not be assessed any late payment fees for 2022, regardless of ho high my 2022 state income could end up being for that year.  The analogy for IRS, would be that there would be no penalty if I paid 25% at each quarterly due date.   In either case, using the 110% of last years tax liability avoids penalties.  Agreed?  Thanks.