Achieving Safe Harbor Through A Single Estimated Payment

[timbukktoo]

Let’s assume that my day job will yield an equal amount of wage income (approx. $53,000) and federal taxes withheld (approx. $5,000) in 2020 as it did in 2019. I still had $2500 in taxes due in my 2019 return as a result of additional income through mutual fund dividends. My total tax liability in 2019 was $7,500 ($5000 + $2500).

I am certain that in 2020 my additional income will be significantly higher than last year and, as such, my 2020 taxes owed will greatly exceed $2500 in 2020.

Can I just pay one estimated tax payment in Q1 for $2,500 and avoid additional quarterly estimated tax payments for 2020 since I would be having 2020 taxes withheld from my paycheck (of at least $5,000) and this one 2020 estimated tax payment of $2,500 would result in having paid at least 100% of my prior year’s total tax liability? Would this accomplish “safe harbor “? Of course I would be making sure that I have enough money next April to fully pay what I owe, but I want to earn interest on this additional income and I would like to avoid the hassle of having to pay four quarterly payments that are really just estimates anyway. The key is I will pay the taxes due but I want to avoid any penalty.

[pk]

@timbukktoo , if the simple question is  can a taxpayer whom is  required to / should  pay estimated taxes during the year ( in addition to with-holdings ), pay a onetime  and not per quarter --- YES.   This may avoid  interest charges if the tax liability outpaces the  required withholdings.   Note that this applicable to both the Fed and the State.

Is this what you meaant ?

[timbukktoo]

Not sure based on how you phrased it. 

[pk]

@timbukktoo  if you pay only one time  and the full amount  instead of paying quarterly, you will achieve the same result --- i.e. you can only one time.

[timbukktoo]

Thank you.  Your response is helpful.   Let me try the question this way.  Based on the information provided in my original post, would you agree with this statement?:

“I have a belief that my federal tax liability for 2020 will be approximately $22,000 (from which $5,000 in federal taxes would be already withheld periodically by my employer in my monthly paychecks, and $17,000 in 2020 federal taxes would be still owed due to stock dividends received and other one-time income windfalls).   If I pay a single 2020 estimated tax payment of $2,500, I would achieve paying federal taxes that would be equal to my total tax liability in 2019 (i.e., $5,000+$2,500=$7,500).  When I do my 2020 tax return, I will see I owe $14,500 in federal taxes ($22,000 - $7,500).   I will pay the $14,500 to the feds on April 2021, but I will not pay any penalties or interest on that amount owed as I have safe harbor.”

Would you agree to this assessment?  (By the way, I reside in a state with no state income tax)

[pk]

@timbukktoo , in general, I would agree that you could reach your goal of avoiding  interest and penalty charges by this process -- the whole thing depends on the exact figures.  Suggest a careful reading of section  6654 of the IRC -- there are a lot  of ands ifs and buts.  The easiest way to stay clear of the charges ( addition to  taxes under chapter 1, 2 and 2A would be to pay all dues  by Jan 15th of  2021  or pay all dues  and file a return  by Jan 31st. of 2021.  I am attaching a link to the section of the code  -- takes a little patience to read through ( you can skip over all the  non-applicable parts ) -->

-->   https://www.law.cornell.edu/uscode/text/26/6654

[timbukktoo]

Thanks.  I have trouble comprehending all this tax jargon in the link you provided.  This is just the second year I'm doing taxes on my own through TurboTax so I am a novice.  I really need your help and expertise.  I don't want to be forced to pay up even by January 15th or January 31st because not all of my tax forms from brokerages will be available to me by then.

Please assume the exact figures as I have provided in my earlier posts.  Can I do it?   (Or let me know some circumstance(s) that I will get penalized given the figures provided earlier)

[timbukktoo]

If another 👼expert👼 could chime in, I would greatly appreciate it. 

[timbukktoo]

bump

[pk]

@timbukktoo , sory for the delay in responding to you.   Don't understand the term "bump"

 Ignoring that --- there are only four ways to avoid the penalty ( other then requesting abatement  at the time of filing ),  --  (1) Owe less than $1000  ( withheld/estimated vs actual liability ); (2) 90% of liability  has been  paid/withheld ; (3) 110% of the prior year tax liability equivalent has been withheld / paid  and (4) total liability has been paid by the 15th of Jan OR paid and return filed by 31st. Jan of the following year.

That is what the referred material  talks about except for a few ands/ifs/buts.

Hope this closes your query - I recognize  this may not be what you are expecting but thems  the facts.  Sorry.

[timbukktoo]

Thanks very much.  Your link suggests "If the adjusted gross income shown on the return of the individual for the preceding taxable year beginning in any calendar year exceeds $150,000, clause (ii) of subparagraph (B) shall be applied by substituting “110 percent” for “100 percent”.  

As for your #3, my AGI will not exceed $150,000, so I am going with the belief that the100% prior year tax liablilty paid amount applies to me vs. the 110% amount.