Avoiding quarterly estimated taxes

[timbukktoo]

In 2019 as per customary for me, I paid quarterly estimated taxes due to stock dividends distributed to me throughout the year.  But, in early 2020, I exercised my company stock options and I already have federal taxes withheld that exceed my 2019 total federal taxes by 20%.   For example, if my 2019 total taxes (line 16) was $20,000, and I have already year-to-date 2020 have federal taxes withheld of $24,000, is it safe to say I can choose not to pay 2020 quarterly estimated taxes and just pay what additional taxes I owe next year without penalty?

[DianeC958]

Possibly,  if your tax liability is less than $1,000 when you file there is no underpayment penalty assessed.

Since you have exceeded the amount of tax you paid last year you Qualify for the Safe Harbor Rules of paying at least 90% of the tax due on the prior year return or 110% of for the current tax return. If you have income greater than $150,000 Married Filing Joint or over $75,000 if filing as Single or Married Filing Separate.

[timbukktoo]

Thanks for your response Diane.  Could you please clarify.  I was under the impression that since my ytd 2020 federal tax withholding is already greater than 110% of my 2019 total federal tax owed that I will not incur a penalty even though I will most definitely have a tax liability more than $1000 when I file my federal taxes in 2020.

[KathrynG3]

Yes, please click this link for the Safe Harbor rules from IRS Publication 505, page 25, the top of the third column. See page 22 for Who must pay estimated taxes.

If you pay all federal tax through withholding, you will not have to annualize your income, which reports income earned unevenly through the year. The IRS considers all payments made at any time during the year to be submitted timely when they are paid through your employer. This is not true of estimates, which are considered paid when received. 

I recommend you use this IRS Withholding Estimator to verify that you have paid in the safe harbor minimum.

Here are additional resources for you:

Estimated Taxes: Common Questions

IRS: 2020 Tax Brackets

[timbukktoo]

Thanks Kathyrn.  From the information in one of the resource links you provided (‘Estimated Taxes: Common Questions’), it indicates the following:

“In most cases, 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—over and above the amount withheld from your wages. In some cases, though, the $1,000 trigger point doesn't matter. If your prior year's Adjusted Gross Income was greater than $150,000, then you must pay either 90 percent of this year's income tax liability or 110 percent of last year's income tax liability.”

Based on the above, although I expect to owe more than $1,000 in 2020 taxes (over and above the amount that I will have withheld), I do not need to pay estimated taxes in 2020 because my withholding in 2020 year-to-date has already exceeded my 2019 total income tax liability by 20%. 

If I am missing something, please advise.

[DMarkM1]

The only thing to remind you of here is this discussion is all only to avoid paying a penalty for underpayment of taxes.  This does not avoid the taxes that will be due. Depending on the income you could still owe a tax bill it just won't include a penalty for underpayment. 

[timbukktoo]

Thanks, Mark.  I had read the various rules prior to my original post and just wanted to get reassurance from an expert that I read it correctly, and didn't miss any loophole.  

I will surely have cash on hand to pay for my 2020 tax liability when it comes due next year, but will now be able to avoid the hassle of quarterly payments this year and invest some in a money market fund to earn a bit of interest income with it.