Estimating tax payments for Federal & Georgia

[JQ6]

I am retired so I don't have any wages but have earnings from investment dividend, interest and pension. So there isn't any withholding except for my pension payments which is about $10k.

I made the federal estimated tax payment for the first quarter in April '25 based on what Turbox tax calculated on my 2024 return which was about $2.5k for each or the four quarterly payments . In late April I received significant long term capital gain of about $400k for selling investments. Based on that I used an online tax estimator calculator and my tax liability will be now about $80k for 2025 instead of last year $20k. 

So that I don't get penalty assessed and based on the above, I have few questions:

1).  Do I need to make increased estimated payments because of the unplanned capital gains I received in April, or can I pay all the remaining taxes at the time of filling 2025 taxes?

2).  If I need to increase the payments for the next three quarters, how do I calculate that? should I divide the total 2025 estimate by 3 equal payments or do I need to make large payment for June?

3).  Even if I divide and pay my new total tax liability payments by 3 for next three quarters, will IRS still asses penalty since my first payment is small (I did not receive the gains distribution till April) ?

4). Do I do the same for the Georgia taxes ?

Would very much appreciate if I could get any help & guidance - Thank you in advance. 

[baldietax · Accepted solution]

To avoid underpayment penalty you need to pay tax during the year thru withholding or timely (usually, quarterly) estimated tax, the smaller of either 100% of your 2024 tax (110% if AGI > 150k), or 90% of your 2025 tax - this is your 'safe harbor' amount.

If you are using the ES voucher amounts generated by TT 2024 when you filed your 2024 return and didn't provide estimates for 2025 (Other Tax Situations / Form W4 and Estimated Tax), by default these calculations are based on the 100/110% of 2024 tax, and assuming withholding for 2025 is the same as 2024.  Suggest confirming the amount you are paying for ES and which method/safe harbor it is based upon and keep in mind this calculation in TT was based on a certain amount of withholding so check that is correct for 2025 also.

So for question #1 I think the answer is No you don't need to increase ES if you are paying based on "100% of 2024".  For your situation it's ideal for the "100% of 2024" option as the lower 'safe harbor', as long as you pay the ES necessary to meet that on quarterly basis you do not need to pay the additional tax due for 2025 until you file your return, regardless the amount of additional income or when it occurs.

Question #2/3 - I don't think these apply if you're paying evenly based on 2024; but in case it comes up again, in general if you underpay or miss Q1 the minimum you need to pay is 50% worth of the total ES by Q2 which will not erase the Q1 penalty but will stop the penalty from Q1 accruing interest beyond Q2, and then resume the quarterly 25% for each of Q3 and Q4.  If you miss Q1 say and then split your total ES into thirds you will still be underpaid in Q2 as you need to pay 50% by Q2 not 33%, and underpaid in Q3 as you need to pay 75% by Q3 not 66%.  IRS is assuming by default your income occurs evenly each quarter, also assumes withholding was paid evenly thru the year, and ES need to line up with that by quarter.  The penalty is calculated for each quarter, underpayment is not eliminated by overpayment later (but you can stop the penalty accruing as soon as you address the underpayment situation); but overpayment in earlier quarters will carry forward and offset underpayment in later quarters.

If you were paying the ES based on an original estimation of 90% of your 2025 tax before the cap gain, you can switch to the 100% of 2024 tax ES amounts, and pay in Q2 whatever gets you to 50% of that including your payment in Q1.  You may still have a small underpayment penalty for Q1 in this situation but will only be for 25% of the ES for a few months.

The other alternative if you have a large income event and are paying ES based on 90% of 2025, is to file using the Annualized Income method on Form 2210 (via Other Tax Situations/Estimated Taxes) but can involve some work as you have to provide AGI, withholding etc by quarter (by 3/31, 5/31, 8/31, 12/31).  This method also then requires that you pay all the tax in the same quarter as the associated income so everything lines up.  It's useful method if you have a large income event late in Q4 say (e.g. Roth conversion, cap gains) but couldn't plan for this and then need to pay one-off ES in Q4.  In your case since it occurred earlier in the year and if you are paying using the 2024 tax which is fixed and known amount, you shouldn't need this method, and should be able to avoid paying 60K to the IRS now that isn't due til April '26.

Question #4 can't speak to GA tax but check the state requirements for Estimated Taxes, hopefully they have the same provision to pay based on 2024 tax.

Your question says home & biz version so I think this next bit will apply, but if you are using desktop TT you can use the 2024 version to do a new dummy return as an estimate for 2025 and check all this underpayment penalty math, you just have to allow for different deduction limits and tax rates that would apply in 2025 but you will be able to get close.  You can't carryover a return so you would have to input your 2024 info like the AGI/tax for 2024 as tho carried over from 2023.  Under Other Tax Situations / Underpayment Penalty you can plug in the prior year AGI/tax and it will kick in the lower safe harbor and eliminate the penalty.  In Forms mode if you double-click on Line 38 in Form 1040 and double click again on the worksheet, it will bring up Form 2210 calculations and you should see the safe harbor and penalty calculations there.

For more info on estimated tax see https://www.irs.gov/faqs/estimated-tax

For more info on Form 2210 penalty calcs see https://www.irs.gov/pub/irs-pdf/i2210.pdf

Not a CPA just my 2 cents on this, pls research accordingly, hope this helps.

[JQ6]

Hello Baldietax,

Thank you so much and I very much appreciate your very detailed response and guidance.

Just to summarize and make sure I got it right..

• I checked the worksheet, TT 2024 calculated the 2025 ES estimate amounts based on my 100% 2024 taxes (this amount was minus the pension tax withholdings). 
• On my 1Q payment, I was short couple hundred $, so I will incur some penalty, but I will make up the difference and pay full 50% or more on my 2Q voucher payment.
• So if I keep up with the full ES payment for the remainder of the year, I should only incur the small penalty for 1Q. Which means, even if I miss the ES payments, the maximum penalty would be based on the unpaid ES amounts for the year and no penalty would be assed for all the cap gain I received in 2025.
• Per above, I should not incur any penalty for the large capital gain that I received in April and I can pay that additional balance of $60k taxes when I file the return in April '26. I suppose this applies regardless of the amount of cap gain I received. I was just concerned that I need to pay the estimated 2025 taxes on that amount. Again, this is because TT calculated my 2025 ES payments based on 100% of my 2024 taxes. The other option was to make estimated 90% for ES, but that would not be in my favor since my 2025 tax liability is much more than my 2024 taxes and my ES payments would had been much higher.

If you would please ack my above understanding is correct, I would be very appreciative. 

Thank you again!

[fanfare]

If your periodic withholding and estimates in 2025 are at least 100% / 4 = 25% ( 110% / 4 for certain high income taxpayers) of your 2024 tax, there will be no penalty on your 2025 tax return, regardless of any jump in income.
you are protected from a sudden capital gain or Roth conversion at year end.
you know your prior year's tax when you file by April 15, which is also the first estimated tax payment due date.

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IRS requires you to establish your Required Annual Payment for the year and pay as you go.
Assuning you have no W-2 withholding nor other withholding,
you can base your estimate on prior year's tax , or 90% of this year's tax, whichever is smaller.
each quarter your withholding and estimated tax paid must be at least 25% of the estimate, even if your income is uneven, [Otherwise, you will be penalized.] this is the simplified method, default.
if your estimate is based on this year's tax and turns out to be wrong you may be penalized.
you can compensate by overestimating.
if your estimate is based on prior year's tax, you know that when you file by April 15, which is also the first estimated tax payment due date. How convenient.

In other words, to avoid the complexity of 2210 Schedule AI, you must pay evenly over the year, or one or more periods might be penalized. If you did not act earlier, you have already missed the first payment of April 15.

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When to pay — Estimated tax payments are due four times a year:

April 15 for payment period January 1–March 31
June 15 for payment period April 1–May 31
September 15 for payment period June 1–August 31
January 15 for payment period September 1–December 31

@JQ6 

[baldietax]

@JQ6 yes your recap back looks good to me, and reply from @fanfare is also confirming that the method of paying ES based on 100% of 2024 in your case will minimize your estimated tax requirement for 2025.

[JQ6]

@baldietax & @fanfare 

Thank you so much for clarity and validating my assessment. As mentioned, my 2025 tax liability will be much higher than my 2024 taxes and I didn't want to make any estimate payment for '25 taxes until the filling date next April, and at the same time didn't want to incur any penalty on that.

So as @fanfare summarized..  "estimate on prior year's tax , or 90% of this year's tax, whichever is smaller".

Thank you both, do very much appreciate.