Federal Tax Penalty

[nothing]

hi We expect to receive some capital gain for last year(2020) but have not got the exact number. It is hard to estimate how much it is at this moment. Instead of overpaying the tax we owe (short of budget now), we would prefer to pay the owed tax later + any interest that IRS charges. However, we would like to avoid paying any penalty if possible.

From IRS website, it seems if we pay 100% of the amount of the tax we paid for the previous year (2019) now, and file and pay the excess amount by 4/15, we don't need to pay any penalty except for the interest. Let's say we paid 30K for 2019 and the total we should pay for 2020 is 50K, we pay 30K by 1/15and another 20K by 4/15. We don't need to pay any penalty, correct?

Also, is there a place that I can double check the interest rate that IRS charges? Thanks!

[NCperson]

looks like it will be 3% but subject to change each quarter 

https://www.irs.gov/newsroom/interest-rates-remain-the-same-for-the-fourth-quarter-of-2020

I couldn't find the 1st quarter 2021 press release, but interest rates haven't changed in the marketplace in the last 90 days, so 3% should be safe 

note that normally capital gains is 15% of the profit - that may help you decide how much to pay by Jan 15, 

[nothing]

Thanks @NCperson.

To confirm:

1) there is no other fee/penalty other than the interest if we pay all dues by 4/15, correct?

2) the interest is 3% - it is the annual rate, correct?

Thank you!

[NCperson]

yes, it's 3% (look at the IRS site for the quarterly interest rates, but I can't believe it's changed since last summer) but it it retroactive to July 15 because the IRS assumes you earned the money evenly over the course of the year (that is why I stated if you pay some on Jan 15, it cuts off the interest clock) ... there is a way to report "lumpy' earnings to reduce the interest - work through Form 2210. 

[nothing]

So the interest is actually calculated for a longer period :( But it is still ok given the annual rate is only 3%. 

Also hope to confirm on the 1st question:

there is no other fee/penalty other than the interest if we pay all dues by 4/15, correct?

Thanks!

[NCperson]

correct 

the IRS expects you to pay estimated taxes and if you don't do it according to their formula, they charge you 3% interest - you can see how they do that if you fill out Form 2210 (if you use the desktop version of TT, you can dummy it up rather quickly)

BUT - if you do not pay EVERYTHING you owe by April 15, not only does the interest clock continue, but there is a penalty (I think 5% of the balance due, but don't quote me on that); when the IRS says you have to file by April 15, they really want the money by that date, the supporting tax return can come later.  

[Mike9241]

actually what you will be paying if you didn't pay in enough either through withholding or estimated taxes is an underpayment of estimated tax penalty. its is about 3% for the yearbut the penalty is computed on a quarterly basis 3, 5 8 and 12 months

so the ist quarter would be 3% tines 3/12, for the 5 months 3% times 5/12 and so on 

there is a shortcut method

You can use the short method if:
• You made no estimated tax payments (or your only payments were withheld federal income tax), or
• You paid the same amount of estimated tax on each of the four payment due dates.

otherwise you must use either the regular method Assumes equal amount of tax was owed for each period)

or the annualized income method where you use the actual tax as computed for each period based on the tax as computed on the income for that period

the form used for any method is the 2210

https://www.irs.gov/pub/irs-pdf/f2210.pdf