I received a large federal tax deduction for 2018 in March 2019. This was likely due to estimated tax payments. Should I pay estimated tax for 2019?

[tp05]

My income is fixed.

[DanielV01]

It depends, but probably not.  Usually, you will make estimated tax payments if you expect to have tax due at the end of the year, and, generally speaking, the tax due would be more than $1000 (for Federal taxation).  The fact that you are on a fixed income and received a large refund suggests that the estimated payments you made from last year were largely returned to you.  In other words, you deposited the money with the Federal Government throughout the year and received it back in the form of a refund.  Most economists frown at doing that because it is like giving the government an interest-free loan.  

Whether you choose to make estimated payments or not is your choice, but it is very likely that you are not required to do so.

[tp05]

The reason for the overpayment was that we have incoming pension funds that we were covering for expected taxes with quarterly payments. We will be receiving the same income from these sources for 2019, but have paid no withholding. 

Last year we experienced very high long term care costs, and they will  be higher this year, so that deduction will continue. Therefore, I expect that we may not need to make a withholding payment for this year, but the opportunity to do so will elapse before I receive the usual income and deduction data. 

I have read about underpayment penalties and want to avoid them. 

Should a submit a medium-sized payment?

[Vanessa A]

It will not hurt to make a medium-sized payment.  However, you could go into TurboTax and enter all of your expected income, expenses, and taxes withheld to determine if you are likely to owe anything.  If you do not owe anything, then you would not need to make a payment as long as you have accurately entered all of your information.

[tp05]

I did the calculations on the IRS calculator and they show that I should make a payment equivalent to the income from those pensions. This is probably independent of the expected refund I will receive from LTC insurance, but I don't see a place to enter it, and therefore think I would be depending on the expectation that the refund will be about the same, although the expenses will be 15% higher, and are not deductible. That's why I'm thinking of a payment to cover that. 

Should I go ahead and plan to make a payment, then?

[DanielV01 · Accepted solution]

That also depends.  Part of the question is whether or not the "refunds" (likely reimbursements) you receive are taxable or not.  Since LTC insurance is usually after-tax, the benefits should be non-taxable benefits.  However, you may want to check with your insurance carrier to see how they report the benefits you received for tax purposes.  If those payments are non-taxable, you wouldn't have any additional issues other than to determine how much tax you must pay for pension/Social Security income.

Even if that income is taxable, however, you are still not required to make any estimated payments unless: 

1. You will owe more than $1000 in tax at the end of the year, and
2. The amount of tax you will have paid in (including withholdings) is either 90% of your tax due for the year, or you paid in enough tax (through withholdings and/or estimated payments), to be able to match (or exceed) your tax liability for the previous tax year (tax year 2018).  If you are a "high-income" earner, you might have to match 110% of your 2018 tax liability.  (You would need significant 6-figure income to reach this threshold.  Since your income is fixed that is highly unlikely for you.)

In any situation where a taxpayer is considering estimated payments, it is generally wise to not overestimate the amount of tax needed.  Otherwise, you are giving the government a tax-free loan.  It makes more economic sense to owe a little at the end of the year than get a large refund.  But that choice is still up to you.  

You can, therefore, choose to make an estimated payment even if not technically required.  I do recommend that if you are leaning to making an estimated payment, make sure the reimbursement is going to be taxable to determine the right amount of tax to pay in.