Estimated Taxes

[CB1946]

I am looking for advice on how to prepare estimated taxes for 2026.  My issue this year is that I had a large capital gain in Q1 and I expect my income will continue to be uneven and somewhat unpredictable during the year.  (Note: Only a small portion of my income is predictable and subject to withholding tax.)

There are a couple of alternatives:

1.   Use the 100%/110% safe harbor rule.

2.   Complete form 2210 Schedule AI to annualize my income. 

The safe harbor rule can work but I have two concerns about it.  First, due to the large gain in Q1, my tax liability in 2026 is going to be much larger than it was in 2025 (like 2 or 3 times).  It creates the appearance that I significantly underpaid my estimated taxes which makes me feel a little uncomfortable.    Second, there is a risk, albeit small, that if I or the IRS finds an error in my 2025 return that increases my 2025 tax, it will cause a problem in my 2026 return due to the fact that my estimated tax payments will be lower than the corrected tax liability in my 2025 return.  This cascading effect is true in other situations where a subsequent year's tax return is dependent on figures from the subsequent year's tax return, such as applying an overpayment of tax from one year to the following year's tax liability.    

There are three  concerns that I have with annualizing my income via Form 2210 Schedula AI.  First, I have never annualized my income before and I am not sure how it works.  Second, I don't know if TurboTax Premier supports Form 2210 Schedule AI.  Third, the instructions state that annualizing is based on actual income received to date in 2026.  I do not have complete actual income for Q1, and won't have it for other quarters as we move forward in the year.  For example, I have interest income from my March brokerage statement but I don't have offsets to it such as bond premium and accrued interest.  Similarly, I have dividend income, but I don't have the amount that are foreign dividends, the corresponding foreign tax paid and the associated foreign tax credit.   There is a fair amount of information I won't have until I receive tax statements/1099s from my broker in 2027.

I would appreciate any thoughts or suggestions you may have. 

[baldietax · Accepted solution]

AI method is a huge pain you have to calculate yourself the quarterly AGI, withholding, qualified divs, cap gain etc (uneven quarters thru 3/31, 5/31, 8/31, 12/31) it's like doing 3 extra tax returns, you may have to do it for state also.  It's helpful if you have an unplanned Q4 event like Roth conversion and need to pay one-off ES late in the year; if you have a big income event in Q1 you can always estimate and plan quarterly ES anyway, there is no need to pay all the tax in Q1 for it.

If you have a big jump in income such that 100/110% prior year tax is the lower safe harbor then take advantage of that rule.  You will have a known, fixed quarterly ES payment (assuming you meet any planned withholding for the year) and it won't matter the timing of your unpredictable income or how much it is.  There is no "appearance" of underpayment, it you meet the requirements of Form 2210 you will not have a penalty.  Hence the term "safe harbor".  You still need to have a good estimate for 2026 and set aside what you owe in April 2027.

As for the concern IRS may adjust your 2025 return to the extent you owe more tax resulting in a significant change of ES and penalty, that sounds like a very low risk (depending your situation).  If it happens you would just need to catch up ES payments to the new level and may have some penalty for earlier quarters (e.g. if you find out beginning of June you owe $4000 more ES that's $1000 per quarter, you know it time to adjust for Q2 onwards, and you'd pay an extra $1000 right away to stop the penalty on Q1 - for about 2 months the penalty will only be $1000 * 0.07 * 2/12 =$12).  If really concerned about this you could also overpay Q1 to create some contingency, if nothing changes any overpayment from earlier quarters carries forward to later quarters and you can pay less later, it's just lost interest for you.  Unless you have something uncertain or questionable about your 2025 return I wouldn't worry about it.

Personally I did AI method for 2024 due to Q4 Roth conversion, it was a huge pain and probably took as much time as my original return, then I had to do it for state also.  To avoid this for 2025 I paid ES based on prior year and did the Roth conversion right away in Q1 as timing was not an issue - no AI method, no penalty.

If you are using Desktop TT you can play around with 2025 s/w to mock up 2026 return (albeit with 2025 tax tables or deductions but will be in the ballpark) and plug in different income and ES payments and view Form 2210 in Forms mode to see there is no penalty regardless of how much income you make as long as you meet safe harbor based on prior year tax (use Other Tax Situations / Underpayment Penalties to set the prior year tax and AGI).

Not a CPA but that's my understanding based on what you described, hope this helps.

[CB1946]

Thanks for your awesome response.  You are right.  I should (and will)  go with the safe harbor rule because my income is somewhat unpredictable and uneven.  It also makes sense because my 2026 income is almost certainly going to be much larger than 2025.  I will also use the safe harbor for my state taxes.  It is the same as the 100% federal rule.  I will need to be sure  to set aside enough cash to cover the large tax payments that will be due on both the federal and state returns in April, 2027. 

Regarding my concern about an error in the prior tax return impacting the subsequent return, I am not aware of any errors in my returns.  However, taxes and the software are complicated and honest mistakes can happen, though they are rare.

You may not be a CPA but you undoubtedly qualify for an honorary CPA certificate.

Thanks again.  Good luck to you.