Paying 100% of prior year's tax to avoid penalty for underpayment of estimated tax

[ttlc22019]

I have a question on paying estimated tax as https://www.irs.gov/penalties webpage has a section “Failure to pay proper estimated tax: Internal Revenue Code 6654”.  However, the section does not say how (or the steps) to properly calculate for the estimated tax.  It only says “Estimated tax payments are generally required, if you expect to owe $1,000 or more when the return is filled.”  So instead of trying to do the calculation and make mistakes, I am thinking of paying 100% of the prior year’s tax, based on IRS “Topic No. 306 Penalty for Underpayment of Estimated Tax | Internal Revenue Service”.  It says “…if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.” If this is a workable solution for a busy full-time working taxpayer, can he pay 100% of prior year’s tax on the second quarter date of June 15 as April could be the busy month for filing tax returns?

[DJS]

No. You need to make the quarterly installments or you would run afoul of the late payment penalty rather than the underpayment penalty. You could make life easy on yourself by using the EFTPS (Electronic Federal Tax Payment System) to file and pay your quarterly taxes. You can even schedule payments a year in advance to be withdrawn from your bank on the payment due date. Very straightforward and very easy. 

https://www.eftps.gov/eftps/direct/EftpsHome.page 

[Mike9241]

by the way that 100% of last year's taxes is 110% if your adjusted gross income for the prior year was over $150,000

[notch1200]

This is my first year on turbo tax. Lasrt year I had a very small tax liability and I let irs hold from my refund 100 percent of my 2021 tax liability. This year my income is again up and turbo tax is calcularting a penalty for underpayment of estimated taxes. How do I solve this?

[Vanessa A]

One hundred percent of your refund is not the same as 100% of your tax liability.  

You would need to look at line 16 of your 2021 tax return to see your 2021 tax liability.  Your refund is however much you paid in for 2021 plus your credits minus your tax liability.  If for example, last year you had a $7,500 EV credit, but your tax liability on line 16 was $10,000,  and you paid in $10,000, you would have had a refund of $7,500, so if you left the IRS keep it, you would be short by $2,500 and you would owe a penalty.

 In this situation, $10,000 is the amount that you should have made total payments of through withholdings, last years refund and estimated quarterly payments, not $7,500 that the IRS kept for this years taxes.  

If through the above 3 methods, you did not pay in an amount equal to line 16 of your return this year, then TurboTax will calculate a penalty because you did not have enough withheld. 

Also, did you enter that you had your last years refund held to cover this years taxes?  If not, then select the following steps to report this amount:

• Deductions and Credits
• Other Income Taxes
• 2021 Refund Applied to 2022
• start next to 2021 refund applied to 2022 federal taxes. 

As you continue through the return, TurboTax will ask you if you would like to see if you qualify for a waiver of penalty.  Select yes, at this point, if you did have 100% of last years tax liability paid, then the program will walk you through form 2210 to get rid of the penalty.  You will need your 2021 income tax return numbers to fill this form out.