PLEASE HELP! ESTIMATED TAXES! URGENT!

[Kikipantspie]

Please - Can you advise me? I just (in Feb 2021) received a $10K penalty payment demand (payable next week) from NY State saying that I failed to pay estimated taxes in 2018 on the large capital gains from the sale of my home in mid-July of that year. I had no clue at all that I needed to pay estimated taxes in the same year that I sold, and instead had a tax preparer prep my 2018 taxes and sent huge tax checks to both IRS & NYS on the due-date Apr 15, 2019. Now that I received this demand letter (and have the ability to.protest it), I have researched and it seems(?) that I may NOT in fact owe this penalty because apparently the requirement to pay estimated taxes is based on your PRIOR-year tax liability. In my case, I was not working in 2017 (the year prior to my 2018 home sale), and had no income in 2017, and therefore did not have a tax filing requirement (and therefore I did not file in 2017), and had no 2017 tax liability.  I cant tell if I am understanding the rules & all I'm reading on this topic correctly and if in fact I can fight this giant demand for penalty payment. Can someone please advise me as I dont know if my understanding is correct & that in fact I did not have to pay estimated taxes in 2018 on my home sale, by virtue of the fact that I didn't have a filing requirement or any tax liability in 2017. Kindly advise as I am terrified. Thank you so much in advance.

[MinhT1]

For New York state, you were required for 2018 to pay in estimated tax at least 90% of your tax liability. This is because you did not file a 2017 NY tax return. The rule in NY requires that to compare your estimated tax with the previous year tax liability, you were required to have filed a tax return the previous year and that that tax return must be for a full 12-month year.

Therefore, New York state is right to claim the penalty.

Please read this NY revenue document.

For Federal taxes, as you were not required to file a tax return in 2017, you are not required to pay estimated taxes for 2018.

Please read this IRS document.

[Kikipantspie]

Thank you so much for your reply. May I ask you please...The exact point you brought up about the NYS requirement to have filed a return in 2017 in order to qualify for the $0 estimated taxes, is precisely what is confusing me.  If I wasn't REQUIRED to file in 2017 because I had no income and no tax liability, and therefore I didn't file, isn't it the same as having a $0 2017 NYS tax liability? And therefore no requirement to pay estimated taxes on the 2018 cap gains from the sale of my home? I am grateful for any further feedback/clarification that might help me protest this penalty. Thank you.

[DawnC]

The penalty is not for paying the estimated taxes based on your 2017 income (which you had none).   The penalty is for underpaying the 2018 taxes.  Basically, you incurred the tax during July of 2018 but did not pay the tax until 2019.   

Underpayment penalties are assessed if you don't withhold or pay enough tax on income received during each quarter.   In fact, it's entirely possible to get hit with an underpayment penalty even though you paid your tax bill in full by the April deadline.   It is all about the timing - specifically when the tax was incurred as opposed to when it was paid.  

You probably do owe a penalty, but you should definitely make sure the NYS is calculating the penalty correctly as they tend to maximize the penalty in their favor, not yours.  

You have the right to challenge—or protest—any Tax Department bill or notice that you disagree with. You can protest in different ways, depending on the kind of notice you received, and whether the time limit stated on the notice has expired.

Respond to your notice or bill online - You may be able to request a penalty abatement in your situation.  

[Kikipantspie]

Thank you so much for your feedback. I think I understand what you are explaining, but their own instructions regarding estimated taxes say that you have to pay the lesser of your 2017 tax liability (in my case my 2017 liability was $0, and didn't have a filing requirement so I didn't file in 2017) -OR- 90% of 2018's estimated taxes. So I paid the lesser, meaning $0.  So...Am I missing something? And sorry...can you kindly clarify what you mean when you say a "penalty abatement"? Is that a full wiping out of the penalty or just a reduction? And on what grounds would you suggest I request the abatement or protest the penalty? How would you suggest I can justify it, please? Your feedback would be so appreciated. I feel over my head with all this...I honestly thought I had done it all correctly and even hired a tax preparer (for the first time in 38 years of my life) to calculate my 2018 state & federal taxes to make sure it was all calculated properly and paid in full. And he never mentioned anything about estimated taxes or penalties. 

[SweetieJean]

Then you really need to go back to that tax preparer and have him/her make it right.

If you read the NYS rule carefully, it says:

You must have filed a return for 2017 and it must have been for a full 12-month year.

But you did not file a 2017 return, so you can't use the "lesser of" provision.

This is one reason that folks with zero income sometimes file a tax return that shows only $1 of interest on it. That way, it's recorded, and lessens the chance of an Identity Thief filing a return with your SSN.

[DawnC]

When it comes to the penalty, is all about the timing.   If you do not pay your tax when due, they will charge you a penalty in addition to interest. The penalty may be waived if you can show reasonable cause for paying late.   If you paid someone to file your 2018 tax return, they may be able to do this for you - they should anyway.   They will usually wave it in cases like this, where it was a one-time transaction as long as you don't have a history of late payments, which it does not sound like you do.  Please see Request penalty abatement for my client.  

The penalty charge is:

• 0.5% of the unpaid amount for each month (or part of a month) it is not paid, up to a maximum of 25% 

You incurred the tax in July but did not pay the tax until the following April, so they are charging (probably overcharging) you interest and penalties during that time period.   See Penalty for underpaying your estimated tax from the NY state website.   

[Kikipantspie]

Thank you so much for clarifying and providing guidance. I feel so overwhelmed because the penalty demand bill they sent me is for $10,000 because the capital gain was so extremely large on the sale of.my home! And the crazy thing is that I literally left all the cash proceeds just sitting in my Bank account from the time of the closing on the sale of the home,, and left it there untouched so it would be ready for paying whatever the taxes calculated to in April 2019. I would have paid them in 2018 had I known that estimated payments were required on a home sale.. I had no clue.. And I already went back to the tax preparer a couple of days ago when I got this demand for payment and asked him why he never raised this with me, and why he didn't review this potential penalty issue with me back in April 2019 (when Im guessing the penalty would have been much lower..instead of 2 years later now...), and he had no answer at all. He just argued and took no.responsibility for any potential errors & instead used the happenstance of my 2017 $0 tax liability (which he didn't know about when he prepared my 2018 return and only learned about now due to this NYS letter), as my "out" for ever having been responsible to.pay 2018 estimated taxes. He says that if you look at the instructions regarding the penalty, my calculation for penalty is $0 because instructions state to use lower of 2017 liability or 90% of 2018 liability...So he says I had no responsibility to pay the estimated taxes to begin with.  (So...I dont know what is right, I don't know how to defend myself and I'm also terrified because I also didn't pay estimated taxes to the IRS for the cap gains on my home sale because I didn't know that was necessary...I just paid the full calculated amt in April 2019. Am I going to eventually get hit also with a monster penalty bill from the IRS for the same issue? Again..in reading their instructions re penalties, it seems to say that my $0 2017 tax liability rules & no penalty would apply...But I have no clue if I'm interpreting it wrong & am terrified about that potential bill showing up too.) And yes..to confirm your hunch...I have never ever had any late payment or issues or underpayment ever with any tax authority in my life. I am the most responsible, by the book person alive. I just simply had no.clue at all about paying estimated taxes on a home sale. Any further wisdom, research or feedback on all these specific tax instructions/rules that you think would help me in this insane situation would continue to be appreciated. Your feedback so far has been very helpful.

[Kikipantspie]

Thank you...yes..I did read that rule about needing to have filed the 2017 return after receiving this demand for payment. That's actually why I was baffled and felt like I am now between a rock and a hard place ...But....if I didn't  have the Requirement to file in 2017 because I had no.income, isn't that essentially the same because I did in fact have zero tax liability that year. I clearly am not tax savvy and never would have filed taxes when I didn't have a requirement to file due to no.income.  I definitely would never have thought of filing to prevent someone from filing under my ss#. And I contacted my tax preparer who did this 2018 return (NYS & Fed) and he is taking zero responsibility and claims that my 2017 $0 tax liability (despite not having filed due to not being required to) undid my obligation to pay estimated taxes on the 2018 sale of my home. So...I dont know if he is right, or if the lack of 2017 filing undoes that rule, or if my not being required to file in 2017 puts me right back to being okay and not liable for estimated taxes or penalties. I am so completely & totally confused. 

[MinhT1]

The rules are different between the IRS and the state of New York.

Please read carefully the 2 documents in my previous reply.

You are compliant with the IRS as you can use $0 as your 2007 tax liability if you not required to file a Federal tax return.

For New York, it is specifically stated that in order to use the previous year tax liability as a reference. you must have filed a tax return and that return must be for a full 12-month year.