Confused about whether I have to pay IRS Federal estimated tax

[TaxableTurtle1]

I have been unemployed all of 2022 and will be all of 2023.

I (try to) make some income in the stock market.

In 2022 my Federal tax summary draft looks like this:

2022 Federal Draft

• Adjusted Gross Income $ 17,600.00

• Taxable Income $ 4,642.00

• Total Tax $ 0.00

• No Refund or Amount Due $ 0.00

• Effective Tax Rate 0.00%

In 2023, I can't be certain how much income I will make in 2023, but I am on track to make $50,000 in interest and trading capital gain income this year.

• Do I need to file estimated taxes? 

• Follow-up: If I DON'T file estimated taxes, will I be hit with any penalty/fee/interest from the IRS for not having paid throughout the year?

I don't mind paying the 2023 taxes in one lump sum in April 2024 (I have earmarked a savings account with the money for it ready).

[bluedeb · Accepted solution]

To determine whether you need to make quarterly estimates, answer these questions:

1. Will you owe less than $1,000 in taxes for the tax year after subtracting your federal income tax withholding from the total amount of tax you expect to owe this year? If so, you're safe—you don't need to make estimated tax payments.
2. Do you expect your federal income tax withholding to amount to at least 90 percent of the total tax that you will owe for this tax year? If so, then you're in the clear, and you don't need to make estimated tax payments.
3. Do you expect that your income tax withholding will be at least 100 percent of the total tax on your previous year's return? Or, if your adjusted gross income (2022 Form 1040, line 11) on your tax return was over $150,000 ($75,000 if you're married and file separately), do you expect that your income tax withholding will be at least 110 percent of the total tax for the previous year? If so, then you're not required to make estimated tax payments.

If you answered "no" to all of these questions, you must make estimated tax payments using Form 1040-ES. To avoid a penalty, your total tax payments (estimated taxes plus withholding) during the year must satisfy one of the requirements we just covered.

Just remember that taxes are paid as you go.  You could incur a penalty for not paying taxes through the year. Typically, underpayment penalties are 5% of the underpaid amount, and they're capped at 25%. Underpaid taxes also accrue interest at a rate that the IRS sets annually.

How do I avoid paying quarterly estimated taxes?

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

[TaxableTurtle1]

Sorry but I don't understand the wording of those instructions (I found them before), points #2 and #3, and need help applying it to my situation.

I owed $0 federal tax liability for tax year 2022. Do I need to pay estimated taxes? Will I be hit with a penalty if I don't?

Does me having owed $0 federal tax liability for 2022 meet the criteria in #2 or #3 of what you posted?

It looks like you are pasting the text from this TurboTax page https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-p...

That TurboTax page also says further down "The safest option to avoid an underpayment penalty is to aim for "100 percent of your previous year's taxes." Well in my case my previous year's federal tax would be $0 and 100% of $0 is still $0. 

So really I'm just hoping for a direct answer to my questions:

I owed $0 federal tax liability for tax year 2022. Do I need to pay estimated taxes? Will I be hit with a penalty if I don't? 

Thanks a lot

[BrittanyS]

If your tax situation will not change for 2023, you are not required to make estimated tax payments.  However, at any point during the year your situation changes, you will want to reevaluate you income and make a determination on whether you need to make tax payments.  

For more information, see the link below:

Estimated Tax Payments

@TaxableTurtle1 

[TaxableTurtle1]

It will change because as I said in the first post, in 2022 I owed $0 and in 2023 I might have a gain of $50,000 at most.

The link you just sent me says "The safest option to avoid an underpayment penalty is to aim for "100 percent of your previous year's taxes."

Previous years (meaning 2022 tax year) taxes was $0.

100% of zero dollars is zero dollars. 

My question is "I owed $0 federal tax liability for tax year 2022. Do I need to pay estimated taxes? Will I be hit with a penalty if I don't? "

Thanks

[DawnC]

You are not required to pay estimated taxes based on your 2022 income.   However, you should make an estimated payments in 2023 for the 50K gain you expect to report in 2023.   Underpayment penalties are calculated by quarter.   If the gain is early in 2023 and you don't pay the tax until the 4th quarter, you could generate an underpayment penalty.  

The IRS levies underpayment penalties if you don't withhold or pay enough tax on income received during each quarter.   Even if you paid your tax bill in full by the April deadline or are getting a refund, you may still get an underpayment penalty.

[TaxableTurtle1]

Thanks a lot. There is some nuance in this so I appreciate you confirming my understanding.

I don't HAVE to pay, on account of my $0 2022 tax liability. But there is a catch... if I DON'T pay and have a $50K gain, then I will still have to pay a penalty, regardless of my $0 2022 tax liability?

Is that right? 

So I am not required to pay, but if I don't I will have to pay a penalty. 

I actually found some IRS instructions on line, and they tell me I don't have to pay, but they leave that bit out. What a dirty trick!!!! This is for real? 

Very tricky, so I just want to confirm. 

[DMarkM1 · Accepted solution]

No.  According to the IRS here you would not be subject to penalty if you have zero tax liability in the previous tax year. 

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.

[TaxableTurtle1]

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@DMarkM1 wrote:

No.  According to the IRS here you would not be subject to penalty if you have zero tax liability in the previous tax year. 

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.

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Thank as a lot. I'm going with the last answer from DMarkM1 because it makes the most sense.