Income Coming In at Different Times of the Year

[freddytax]

For 2024 I had a large capital gain in January.  Then at the end of the year I bought a home and generated quite a bit of income through the sale of stocks, funds and CDs.  So then I had all this income at the end of the year.  I did make a quarterly tax payment in Q1 but none in Q2-Q4.  And I got dinged for for an estimated tax penalty in TT for $3,000.

So question is does the IRS give you a break if your income is sporadic during the year like my example above?  The home purchase was not known until December and the income I needed to purchase it.

[Bsch4477]

The IRS’s position would be for you to make an estimated payments in the quarter that you had unexpected income to cover your anticipated tax liability. 

[rjs · Accepted solution]

When a large portion of your income was at the end of the year you can get a break on the estimated tax penalty by using the annualized income method to calculate the penalty. It takes into account that the income occurred at the end of the year, so you were not required to make estimated tax payments earlier in the year. When you go through the "Underpayment penalties" topic in TurboTax it will ask you if you want to use the annualized income method.

[freddytax]

Thank you!!

[freddytax]

Thank you.  I forgot about the annualized method - I have used it before.  I actually had a large capital gain at the beginning of the year, interest and dividends throughout the year, and then several large capital gains at the end of the year.  So bottom line the method didn't help me.  I did figure that the penalty came to 4.1% which I'm making in an HYSA.  I do have to pay taxes on the interest I'm earning but I'm probably nickel and diming it here.

[baldietax]

If you didn't pay the ES for Q2-4 then AI method won't eliminate the penalty.  If it was just a Q4 event I would have thought it would reduce the penalty as it would show the income coming later in the year rather than assumed to be evenly happening during the year; but the AI method will conversely penalize you on Q1 as it moves all that income earlier rather than assuming it was even thru the year; so maybe some of it ends up a wash depending the amounts.  I fell into AI method last year due to a Roth conversion and it worked out as it lined up with a high Q4 ES, but was a lot of work I hope to avoid again.  If you expect volatile income to the upside then paying ES based on prior year (100% or 110% if AGI > 150k) is more predictable and since ES are known and fixed, the timing of additional income events the following year doesn't matter.

The penalty rate is 8% but I think as you found this gets averaged out if you look in total due to the quarterly underpayment calculation, but if you miss Q1 ES you would see a higher penalty impact than missing Q4 ES.

(probably things you already know but thought I'd chip in)