Estimated taxes

[aem1337]

Hi,

I recently sold a rental property and will owe a significant amount in capital gains taxes for 2020.  I’m trying to figure out if I need to pay estimated taxes. I feel like I should have to pay them, but then I read this rule on irs.gov:

“Generally, you must make estimated tax payments for the current tax year if both of the following apply:

• You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and
• You expect your withholding and refundable 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’s tax return must cover all 12 months.)   “

I’m having a hard time interpreting what it means. If my withholdings are similar to last years, I should be ok? 

Any insight with this would be appreciated! 

Thank you. 

[phildonnia]

I like to focus on this part:

"100% of the tax shown on your prior year’s tax return. “

This is in here because you can't predict the future, and you have no way of knowing what your income will be the rest of the year, and certainly no way of figuring out your tax liability, credits, and deductions.  This little phrase solves that problem.  

It says that if you pay at least as much as your tax liability for the previous year, then there will be no penalties.  Now, you may be able to get away with paying less and not getting a big refund; or you may wish you had paid more and didn't owe so much in taxes in April.  But no penalty if you follow this rule.

Here's the simple calculation:

1. Take the previous year's tax liablilty (NOT the amount you owed, but the total tax liability for the previous year)

2. Divide by four.  That's how much you need to pay each quarter.

3. Subtract any withholding from wages paid for that quarter.  What's left is your estimated tax payment.  

There are lots of other ways to figure this out, that will get different amounts, but will have different risks of paying too much or too little.  This is the simplest way that works most of the time.

By the way, be sure to read the next paragraph which says that "100%" is replaced with "110%" if you had high income in the previous year.  Also note that state taxes have different formulas.  California's is particularly weird. 

Hope that helps.

[aem1337]

Thank you for your response. It looks my paycheck withholdings will more than cover my quarterly liability and I won't need to make any estimated taxes (at least not for the 1st 2 quarters).