Estimated tax not required if withholding > 2019 tax?

[catdelta]

Hi there,

I found the following rule from IRS' 2020 ES policy:

In most cases, you must pay estimated tax for 2020 if both of the following apply.
1. You expect to owe at least $1,000 in tax for 2020, after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:
a. 90% of the tax to be shown on your 2020 tax return,
or b. 100% of the tax shown on your 2019 tax return. Your 2019 tax return must cover all 12 months.

Assume that 1) my income contains only salary in 2019, 2) my salary increased more than 10% in 2020, and 3) I have both salary and stock sale income in 2020.

Because of over 10% increase in salary and addition income from stock, 90% of my 2020 tax is greater than 100% of my 2019 tax.

And my tax withholding (merely from salary) for 2020 is then also higher than my 2019 tax.

Does this mean that no matter how much income I make from stock sale (even greater than my salary), I do not have to prepay tax because of Rule 2 does not apply?

Thank you very much for explaining. From the terms it seems so, but it looks abnormal.

[Anonymous_ · Accepted solution]

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@catdelta wrote:
2. You expect your withholding and refundable credits to be less than the smaller of:
a. 90% of the tax to be shown on your 2020 tax return,
or b. 100% of the tax shown on your 2019 tax return. Your 2019 tax return must cover all 12 months.

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Note that it is the smaller of 90% of the tax shown on your 2020 return or 100% of the tax shown on your 2019 return (the 100% can increase to 110 percent based on adjusted gross income). 

For example, if the tax shown on your 2019 return was $20,000 and you paid $20,000 in estimated tax, or had that amount withheld during the 2020 tax year, there would be no penalty even if your 2020 tax liability turned out to be a total of $30,000.

[catdelta]

Hi tagteam,

Thank you very much for your reply.  As my 2019 income had only salary (several hundreds dollars of interest, but can be ignored), my final 2019 tax was even smaller than my 2019 withholding after the tax refund based on standard deduction.  Therefore my 2020 withholding is greater than both 2019 withholding and 2019 final tax.

[Carl]

To put it a simpler way:

If at tax filing time what you owe the IRS is more than $1000 *OR* more than 10% of your total tax liability (whichever is HIGHER), then an underpayment penalty will be assessed.

[Anonymous_]

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@Carl wrote:

To put it a simpler way:

If at tax filing time what you owe the IRS is more than $1000 *OR* more than 10% of your total tax liability (whichever is HIGHER), then an underpayment penalty will be assessed.

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You have posted that previously, @Carl, and, although whether or not you believe it is a more simple way to put it, in actuality it is simply not accurate; penalties are primarily based upon what the taxpayer's income tax liability was for the prior year (if any).

In other words, you cannot simply look to what is owed for the current tax year, at "tax filing time", to determine whether or not an underpayment penalty will be assessed.

[fanfare]

If your withholding comes up to 90 % of last years TAX, then yes, you can make any amount of profit in the market (lucky you) and not need to make an estimated tax payment.

However, note that the year after that, your previous year TAX is going to be large.

[Critter-3]

What are estimated taxes?

https://ttlc.intuit.com/replies/3301588

Do I need to make estimated tax payments to the IRS?

PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2015  SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

Can TurboTax calculate next year's federal estimated taxes?

https://ttlc.intuit.com/replies/4242911

Can TurboTax calculate the estimated payments for next year's state taxes?

https://ttlc.intuit.com/replies/3301735

[catdelta]

Thank you all for taking a look at my situation. I have done some further research but still got some confusing points.

1. Do IRS and states track the timing of stock sale? I did not make any profit in Q1 and Q2 so certainly did not pay estimated tax. If I have to pay estimated tax based on the calculation taking Q3 stock profit into consideration and I paid it in Q4 (after Oct 15 but before Jan 15, 21), will there be any penalty? If yes, would the penalty only accrue interest for 1 quarter (as there was no underpayment in Q1 and Q2).

2. Thank to this community now I understand IRS' rules determining estimated tax. Is it a simple method that I do not have to pay estimated tax if the other income (stock, interest) is less than 10% of my wage income with tax withheld? (Based on the rule that 2020 withholding > 90% of 2020 final tax). I know it won't be 100% accurate, but so long as the penalty is not material, I am ok.

3. For state tax, as the NY (where I work) state tax is withheld only on wage, am I right that I need to pay estimated tax to NJ (where I live) if the stock gain incurs over $400 tax to NJ (no need to consider withholding by NY)? As I found NJ determines estimated payment only by underpayment, not withholding.

4. I did not know why TurboTax asked me to make estimated payment to NY state. In 2019 my NY tax was quite accurate (only $40 underpayment). I checked the forms and found that TurboTax said that "110% of 2019 final tax" minus "2020 estimated final tax" is greater than $300. However, by the end of Sept, my NY tax withholding is still greater than my expected tax (based on wage income till Sept, standard deduction applied, no need to include stock gain). Can I just ignore the estimated payment? Doesn't TurboTax takes the % of withholding to final tax into consideration for NY state?

Thank you very much for your time, help, and patience!

[Critter-3]

1. Do IRS and states track the timing of stock sale? I did not make any profit in Q1 and Q2 so certainly did not pay estimated tax. If I have to pay estimated tax based on the calculation taking Q3 stock profit into consideration and I paid it in Q4 (after Oct 15 but before Jan 15, 21), will there be any penalty? If yes, would the penalty only accrue interest for 1 quarter (as there was no underpayment in Q1 and Q2).

They don't however if you owe more than $1000 at the end of the year then the IRS will compute the underpayment as happening ratably thru the year so to combat that norm you would have to compute a form 2210AI which is a pain. 

2. Thank to this community now I understand IRS' rules determining estimated tax. Is it a simple method that I do not have to pay estimated tax if the other income (stock, interest) is less than 10% of my wage income with tax withheld? (Based on the rule that 2020 withholding > 90% of 2020 final tax). I know it won't be 100% accurate, but so long as the penalty is not material, I am ok.    

What are estimated taxes?

https://ttlc.intuit.com/replies/3301588

Do I need to make estimated tax payments to the IRS?

PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2015  SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

https://ttlc.intuit.com/replies/3301891

 

How do I make estimated tax payments?

https://ttlc.intuit.com/replies/3301258

Can TurboTax calculate next year's federal estimated taxes?

https://ttlc.intuit.com/replies/4242911

3. For state tax, as the NY (where I work) state tax is withheld only on wage, am I right that I need to pay estimated tax to NJ (where I live) if the stock gain incurs over $400 tax to NJ (no need to consider withholding by NY)? As I found NJ determines estimated payment only by underpayment, not withholding.  False ... they follow the same rules as the feds .... https://www.tax.ny.gov/pit/estimated_tax/who_must_make.htm

4. I did not know why TurboTax asked me to make estimated payment to NY state. In 2019 my NY tax was quite accurate (only $40 underpayment). I checked the forms and found that TurboTax said that "110% of 2019 final tax" minus "2020 estimated final tax" is greater than $300. However, by the end of Sept, my NY tax withholding is still greater than my expected tax (based on wage income till Sept, standard deduction applied, no need to include stock gain). Can I just ignore the estimated payment? Doesn't TurboTax takes the % of withholding to final tax into consideration for NY state?   Based off the info the program has it can calculate estimated payments ... they are suggestions not requirements ...

Can TurboTax calculate the estimated payments for next year's state taxes?

https://ttlc.intuit.com/replies/3301735

[catdelta]

Hi Critter, thank you for your feedback.

Just a quick note, for #3, I mean NJ, not NY.

https://www.state.nj.us/treasury/taxation/njit20.shtml