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chucknjr
Level 3

How to calculate estimated payment when on extension?

I know that the safe harbor for paying estimated quarterly federal taxes is 100% (or 110% if previous year's AGI > $150k) of the previous year's tax.  So let's say you paid $40k in taxes in TY 2018, then to be sure you won't be subject to penalties for TY 2019, you would pay $10k (1/4 of $40k 2018 tax) on Apr 15, Jun 15, Sep 15 in 2019 and $10k on Jan 15 2020.

 

Now let's go forward to Apr 15, 2020.  For tax year 2019 you have to file an extension on Apr 15, 2020 because you have investments in partnerships that are themselves on extension and you have no idea what kind of income they will produce.  So what do you do then considering that you have no idea what your TY2019 tax will be?  My best guess is continue to pay $10k in estimated taxes on Apr 15, Jun 15 2020.  But then Sep 15, 2020 comes along and you finally get your K-1s and are able to calculate your taxable income and tax for TY 2019.  Turns out you had a big year and your 2019 tax is $100k.  So you have a balance due for TY 2019 ($100k total tax minus $40k estimated payments = $60k) so you pay the $60k balance on Sept 15, 2020.  (As an aside, will there be interest due on the $60k balance for the time period from Apr 15 to Sep 15 2020?)

 

You've also underpaid estimated 2020 taxes (you've paid $20k total so far for TY 2020, but owe $100k for the year under safe harbor right?)  So on Sep 15, 2020, do you then make an estimated TY 2020 quarterly payment of $55k ($25k x 3 quarters less $20k already paid), plus a final $25k on Jan 15, 2021?  Will this still result in no penalties or interest due?

1 Best answer

Accepted Solutions
SusanY1
Employee Tax Expert

How to calculate estimated payment when on extension?

Not exactly.   To begin, I will go over the extra costs that would (and would not) apply in this situation. 

 

  1. Penalty for filing late.  There will be no penalty for filing a return late when you file your extension before April 15, 2020.  
  2. Penalty for paying late.  There will be a penalty on the balance due that wasn't paid by April 15, 2020. Why? Filing an extension gives you extra time to submit your return but doesn't give you extra time to pay your tax. How much? This penalty is generally 0.5% of the unpaid tax balance per month, not to exceed 25%.
  3. Penalty for underpayment of estimated tax.  This penalty will not apply for 2019 based on the information you have supplied but may apply for 2020.
  4. Interest.  Interest will apply on the amount of tax not paid by April 15, 2020.  

 

The safe harbor option of paying 100% of the prior year tax only applies to the underpayment penalty.  Therefore, if you have some idea of what the partnership income is for 2019, then you should go ahead and send in additional funds for 2019 to reduce your late payment penalty and interest.  Don't wait until October to send additional funds if you believe you will owe them.

 

For your 2020 estimates, it may be easier to estimate your earnings as you go and aim to pay at least 90% of your tax due in advance of April 15, 2021.  Particularly if the high income in 2019 is not expected to recur. Paying 100% of 2020 tax is a safe harbor, but you are not required to pay that much if you believe you will owe less than that amount. As long as you pay 100% of the prior year tax OR 90% of the actual tax due, you will not have the underpayment penalty. 

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2 Replies
Critter
Level 15

How to calculate estimated payment when on extension?

Sadly when you estimate  your tax  bill in April you need to take the partnerships into consideration ... by April they should have some kind of idea if they will pass thru $10  or  $100,000 even if they are on extension. Ask them for a guesstimate so you can have some kind of figure to work with. 

 

As you can see this one piece of information can cascade down the line and cause unintended penalties. 

SusanY1
Employee Tax Expert

How to calculate estimated payment when on extension?

Not exactly.   To begin, I will go over the extra costs that would (and would not) apply in this situation. 

 

  1. Penalty for filing late.  There will be no penalty for filing a return late when you file your extension before April 15, 2020.  
  2. Penalty for paying late.  There will be a penalty on the balance due that wasn't paid by April 15, 2020. Why? Filing an extension gives you extra time to submit your return but doesn't give you extra time to pay your tax. How much? This penalty is generally 0.5% of the unpaid tax balance per month, not to exceed 25%.
  3. Penalty for underpayment of estimated tax.  This penalty will not apply for 2019 based on the information you have supplied but may apply for 2020.
  4. Interest.  Interest will apply on the amount of tax not paid by April 15, 2020.  

 

The safe harbor option of paying 100% of the prior year tax only applies to the underpayment penalty.  Therefore, if you have some idea of what the partnership income is for 2019, then you should go ahead and send in additional funds for 2019 to reduce your late payment penalty and interest.  Don't wait until October to send additional funds if you believe you will owe them.

 

For your 2020 estimates, it may be easier to estimate your earnings as you go and aim to pay at least 90% of your tax due in advance of April 15, 2021.  Particularly if the high income in 2019 is not expected to recur. Paying 100% of 2020 tax is a safe harbor, but you are not required to pay that much if you believe you will owe less than that amount. As long as you pay 100% of the prior year tax OR 90% of the actual tax due, you will not have the underpayment penalty. 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

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