2020 Estimates based on 2019 income will result in substantial over payment

[popeye20]

Due to sale of investment property and retirement income taxes paid in 2019 will be higher than what is owed in 2020. To avoid penalties we would be required to pay 110% of prior year 2019 taxes as quarterly estimates. By the third estimate we would have paid enough to cover our actual tax liability for 2020 although we will have some income in the fourth quarter. If we pay the fourth quarter estimate we will ultimate be refunded the entire fourth quarter payment plus some additional over payment. Is it necessary to make the fourth quarter estimate or will we receive a penalty for not having sent them 110% of the prior year’s taxes even though it was not owed? Most of our income will be received in the first quarter of 2020 so when we annualized and multiple the amount by 4 it grossly overestimates what our yearly income will be so using the prior year 110% estimated was more accurate. Thanks

[MinhT1]

If you estimate that your 2020 income will be less than your 2019 income and that the estimated tax payments proposed by TurboTax are too high, you can decrease the amounts. On the vouchers, just cross out the amounts and write in the amounts that you wish to pay.

[Opus 17]

You don't have to follow Turbotax's advice if you know your situation will be different.  You don't even need the paper vouchers at all if you make electronic payments instead at www.irs.gov/payments.

[popeye20]

Thank you but the problem is avoiding a penalty. I have annualized due to uneven income ( feast or famine ) and my 1st Quarter 2020 income, when multiplied by 4 results in an income figure that is 3 times what my annual income actually will be. If I pay estimated taxes on that inflated amount I will far exceed what I owe at the end of the year. Due to decreased income in 2020 if I use 110% of the 2019 prior year’s taxes paid for my estimates I will have paid my taxes by the third quarter. In 2019 I had paid enough with 1st Quarter withholding that I should not have owed taxes based on the tax tables for actual income earned in that quarter but due to uneven income I owed a penalty when the 1st Quarter earnings were quadrupled. I annualized to reduce the penalty. The only way I can see to avoid a penalty is to pay all 4 quarters based on 110% of my prior year taxes even though my tax liability would be satisfied with the 3rd payment.

[Opus 17]

If I understand your situation correctly, for the first quarter you would pay a large amount based on 4x the quarter income.  But then for the second quarter, if your income is lower, you would pay based on 4x the second quarter income, and if that was very low indeed, you would pay 1/4 the 110% number instead.  

The penalty thing tends to be very complicated and the IRS gets to have it both ways.  In big quarters you pay more but in low quarters you don't get to pay less.  Then if you have met the 110% by Q3, you can skip your Q4 payment and just pay in full by April 2021 (I think).

However, someone else may have a better handle on this.  

[popeye20]

Thanks - On second quarter you add first and second together then multiply by 2.4, third quarter you combine with early quarters and multiply by 1.5, and for fourth quarter add all income and multiply by 1. If I pay the 1st quarter annualized amount due that will more than cover my upcoming 2020 tax burden but not meet my last year 110% taxes paid figure so that could subject me to a penalty. If I take last years taxes paid and divide by 4 I am not sending them enough on the first quarter to cover the actual first quarter taxes owed. This is indeed a complicated and convoluted way to try to pay one's taxes and avoid being penalized because of fluctuating income.

[VictoriaD75]

To avoid a penalty, you need to make estimated tax payments if you expect to owe $1,000 or more in taxes for the year. The tricky part is estimating income and tax liability before the income is earned, especially for self-employed taxpayers.

If you pay 100% of last year's tax liability (line 16 of your 2019 1040), you can avoid penalties. Simply take the amount from your return, divide by four, and make four equal payments.

However, if your adjusted gross income (AGI) was greater than $150,000, that estimate must be 110% of last year's tax liability.

You can also pay 90% of this year's tax liability to avoid penalties. This is more difficult to estimate, as you need to determine what that amount will be.

Both of the links below provide useful resources on calculating your estimated tax payments.

Estimated Tax Payments

IRS Estimated Taxes