Estimated taxes on investment income

[nomad_dt]

Hello!  New user here.

 I am trying to calculate estimated taxes for tax year 2020.  Here’s my situation:  I have about $10K in interest and dividends, and about $67K in long-term capital gains.  No other income.  I did not use TurboTax for tax year 2019 because I used a free file program.  How can I calculate estimated taxes for this year?

[VictoriaD75]

Generally, the tax rate on qualified dividends and capital gains is 15%. Interest is taxed at the ordinary income rate.

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.

Estimated Tax Payments

IRS Estimated Taxes

Estimated Taxes: How to Determine What to Pay and When

[Cleo4]

Hi Victoria,

I'm using the online Turbo Tax worksheet "Estimated Taxes and Form W-4 Worksheet" to estimate my Q4 2020 payment for federal personal income tax, but the result is so strange I wonder if there's an error in the form (which seems very unlikely).  The result is only half of what I expected. 

I'm updating the form by starting with my prior year information and then updating two items that changed significantly: My wages dropped to only $2800 as I retired in Jun 2019 but have not started Soc Sec, and I sold a large stock holding in Sep 2020 for a significant Long Term Capital Gain (about equal to my prior year's wages).  I also have Taxable Interest and Qualified and Ordinary Dividends. Note this is for married filing jointly.  My 2020 income (Wages + Interest + Dividends + Cap Gains) puts me into the 15% Cap Gain tax bracket (as in 2019).

THE PROBLEM

Turbo Tax is correctly estimating my 2020 Expected Taxable Income (about 90% of my prior year earnings), but the estimated 2020 Income Tax is very low (only 42% of the 2019 income tax). My actual 2019 effective tax rate was 15.4%, but the estimated 2020 effective tax rate is only 7.4%.  The 7.4% rate looks way to low.  

CLUES AND POSSIBLE FIX

I found a clue in the section "Other Tax Information" which has two lines: one shows my Net Investment Income is below the NII 3.8% threshold, and a second for my Qualified Capital Gains. This section begins with the following special instruction: "Note: Include this Income in the Other Income section below."   The section Other Income asks for "Total of other taxable income and losses", which if I follow the prior year's example would include only my Taxable Interest, Ordinary Dividends, and Capital Gains. 

If I ignore this special instruction  I get the results I mentioned above with the questionable 7.4% effective tax rate.  If instead I follow the special instruction, then I add my Qualified Dividends into my Other Income and the form calculates a more reasonable (higher) 2020 tax amount. However there are still two issues: the 2020 Taxable Income now includes Qualified Dividends which is incorrect, and using algebra I can see that the 15% tax on LT Cap Gains is calculated using a base that is exactly $69k less than the amount of LT Cap Gains I entered for the estimate. 

Another clue: If enter zero for Qualified Dividends and zero for Capital Gains, the form calculates exactly the estimated income tax amount I calculate manually using the the ordinary income tax table applied to my Wages + Interest + Ordinary Dividends.  If I then enter my Qualified Dividends, then the form significantly reduces the estimated tax; so it seems to be subtracting the Qualified Dividends from tax base for the calculation. Thus their special instruction to add Ordinary Dividends to the Other Income will result in the correct base for calculating the tax amount, but then the form displays an incorrect Taxable Income that includes Qualified Dividends.  

FINALLY, MY QUESTION

Does this sound like a programming issue, or can you explain some basic tax rules or calculations that I'm missing?