Prepay settlement taxes

[tmsam]

Received some settlement amount and I am sure I have to pay taxes. Received them in November 2020 and when are the taxes due for this amount? Will I have to pay penalty if I don't prepay them.

[Opus 17 · Accepted solution]

First, settlements for personal injury are not taxable, including pain and suffering from personal injury.  Settlements for lost wages are taxable as if they were regular wages.  Settlements for damaged property usually are not taxable, but may be taxable if the property was depreciated in the course of business or if the settlement was for more than you paid for the property.  Settlements for pain and suffering not caused by physical injury, and for punitive damages, are taxable.  

If you have a large lump sum of income in the final quarter of the year (Sept 1-Dec 31), an estimated tax payment is due by January 15, or January 31 if you file your tax return by January 31 and pay your taxes in full.  The underpayment penalty is about 1% per month of the amount underpaid (0.5% penalty and 0.3% or so of interest).  

If you are sure the entire settlement is taxable, then paying about 20-25% as an estimated payment should cover it (or 15% if you are in the 15% bracket and the settlement is not large enough to bump you to a higher bracket).  You take credit on your tax return for the estimated tax you paid and if you overpaid, you get the difference back as part of your refund.  You can make an estimated payment here, 

www.irs.gov/payments

[tmsam]

Hi,

In this situation, Is there any penalty for State Taxes? I have paid estimated taxes for IRS but did not pay to State. 

[Opus 17 · Accepted solution]

The state probably has a similar rule but you don’t say which state it is.  Your state taxes are likely less than federal so any penalty would be proportionately less.  I would not include a penalty payment even if TurboTax suggests it.  Wait and see if the state mails an assessment, and then you can check to see if your state has an appeal process or a first time waiver.  You can plead special circumstances or ignorance.  You would reduce any potential penalty by paying your taxes as earlier as you can.  

[tmsam]

Thank you very much. I live in Michigan.

[Opus 17]

@tmsam 

Here is Michigan’s website on penalties.

https://www.michigan.gov/taxes/0,4676,7-238-43513-485253--,00.html

if you are not ready to file your tax return, you may want to make an estimated payment on the website now. That would reduce any possible future penalty. You will tell TurboTax about the estimated payment so you get credit for it.