I am owing federal tax for 2017 for the first time and not sure about what will happen in 2018, can I use 1040ES anytime in 2018 to pay estimated tax later?

[nestlen]

According to Turbotax I owe $2500 in federal tax this year due to RSU vesting and unexpected stock wash sale disallowed amount.

My total federal tax due for 2017 is around $60k and my company has withdrawn around $57k from my regular paychecks.

I had no tax liability for 2016 and is a green card holder since 2015.

My situation gets complicated in 2018 because I will get more RSU vesting this year but at the same time bought a primary residence with a mortgage which might be able to offset the income increase through the year.

I prefer not to pay estimated tax at this point because I need money now and can't afford additional payments until June or July.

My questions are:

1. Besides changing W4 (currently already set to 1), can I use 1040ES to pay estimated tax amount later in the year, say August, September etc ? 

2. In the worst case in case I still  end up owing tax next year, how bad would the penalty be (say if the tax I will owe is still less than 10% due on 2018) ? 

[JulieCo · Accepted solution]

It depends.  Here is some information from the article Estimated Taxes - How to Determine What to Pay and When that will help answer your questions above.  Review the information below to determine if you need to pay estimated taxes.  Also, see the section at the end about paying in equal amounts to determine if your scenario qualifies as one where you would unexpectedly make a lot of money in one quarter and then pay the estimated tax instalment at that time.  Again, see more in the following information below:

Do I need to pay estimated taxes?   Review these scenarios for when estimated tax payments would be needed:

That depends on your situation. The rule is that you must pay your taxes as you go.

If at filing time, you have not paid enough income taxes through withholding or quarterly estimated payments, you may have to pay a penalty for underpayment.

To determine whether you need to make quarterly estimates, answer these questions:

1. Do you expect to owe less than $1,000 in taxes for the tax year after subtracting your federal income tax withholding from the total amount of tax you expect to owe this year? If so, you're safe—you don't need to make estimated tax payments.
2. Do you expect your federal income tax withholding (plus any estimated taxes paid on time) to amount to at least 90 percent of the tax that you will owe for this tax year? If so, then you're in the clear, and you don't need to make estimated tax payments.
3. Do you expect that your income tax withholding will be at least 100 percent of the tax on your previous year's return? Or, if your adjusted gross income (Form 1040, line 37) on your tax return was over $150,000 ($75,000 if you're married and file separately), do you expect that your income tax withholding will be at least 110 percent of the tax you owed in tax for the previous year? If so, then you're not required to make estimated tax payments.

If you answered "no" to all of these questions, you must make estimated tax payments using Form 1040-ES. To avoid a penalty, your total tax payments (estimated taxes plus withholding) during the year must satisfy one of the requirements we just covered.

Which option should I choose?

That depends on your situation.

The safest option to avoid underpayment penalties is to aim for "100 percent of your previous year's taxes." If your previous year's adjusted gross income was more than $150,000 (or $75,000 for those who are married and filing separate returns last year), you will have to pay in 110 percent of your previous year's taxes to satisfy the "safe-harbor" requirement. If you satisfy either test, you won't have to pay an estimated tax penalty, no matter how much tax you owe with your tax return.

If you expect your income this year to be less than last year and you don't want to pay more taxes than you think you will owe at year-end, you can choose to pay 90 percent of your estimated current year tax bill. If the total of your estimated payments and withholding add up to less than 90 percent of what you owe, you may face an underpayment penalty. So you may want to avoid cutting your payments too close to the 90 percent mark to give yourself a little safety net.

If you expect your income this year to be more than your income last year and you don't want to end up owing any taxes when you file your return, try to make enough estimated tax payments to pay 100 percent of your current year income tax liability.

How should I figure what I owe?

You need to come up with a good estimate of the income and deductions you will report on your federal tax return.

You can use TurboTax tax preparation software to do the calculations for you, or get a copy of the worksheet accompanying Form 1040-ES and work your way through it. Either way, you'll need some items so you can plan what your estimated tax payments should be:

• Your previous year's return. Use your previous year's federal tax return as a check to make sure you include all the income and deductions you expect to take on your current year's tax return. You should also look at the total tax you paid if you are going to base your estimated tax payments on 100 or 110 percent of your previous year's taxes.
• Your record of any estimated tax payments you've already made for the year. You need to take those payments into account when you determine how much tax you still owe, so have your check register handy to look up the amounts and the dates you paid.

What if I don't pay?

You could end up owing the IRS an underpayment penalty in addition to the taxes that you owe. The penalty will depend on how much you owe and how long you have owed it to the IRS.

Result: You will have to write a larger check to the IRS when you file your return.

Should I pay in equal amounts?

Usually, you pay your estimated tax payments in four equal instalments. But you might end up with unequal payments in some circumstances:

• If you had your previous year's overpayment credited to your current year's estimated tax payments
• If you don't figure your estimated payments until after April when the first one is due
• If you unexpectedly make a lot of money in one quarter

[nestlen]

Thank you for such a detailed answer!  One more question, in case I figure out I owe say $10k tax in Oct 2018 can I file 1040ES then? Or I have to decide it  before April 15th 2018?