Estimated taxes on Increased Investment Income

[mitchden1]

My 2022 capital gains, dividends and interest income will be significantly more than they were in 2021. For my 2021 taxes, I received a refund as I overpaid my taxes. Federal income taxes are being withheld from my annuities and social security. I am retired.

I just increased my withholding from my annuities, however, for 2022,  I estimate that I will still owe a considerable amount of income taxes. I've never had to pay estimated taxes.

Will I be charged a penalty if I wait until I file my 2022 taxes and pay at that time? Irrespective of that, should I make estimated tax payment(s) this year/now? What form(s) do I use to make estimated tax payments? How frequently can they be made?

Thank you.

[fanfare]

see Form 2210 and Instructions for Form 2210 for how to avoid penalties.

@mitchden1 

[DoninGA]

This IRS website has detailed information concerning estimated tax payments and the type of penalty if not enough income taxes are paid during the tax year - https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

Estimated tax payments for tax year 2022 can be made at any time up through January 17, 2023 on the IRS payment website -  https://www.irs.gov/payments

Or you can use the IRS Form 1040-ES to make quarterly payments by mailing the forms and payment to the IRS - https://www.irs.gov/pub/irs-pdf/f1040es.pdf

[NCperson]

@mitchden1 - you can always make estimated payments - the IRS is not going to turn down money!!!!!

[mitchden1]

The IRS page for Estimated Payments says "Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid 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."

Since I received a refund for 2021 tax return, based on the last part of the above sentence, I don't think I would be charged a penalty if I wait until I file my 2022 return and pay then. Is that correct?  If they would charge a penalty, how would they calculate the penalty?

[rjs]

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@mitchden1 wrote:

The IRS page for Estimated Payments says "Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid 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."

Since I received a refund for 2021 tax return, based on the last part of the above sentence, I don't think I would be charged a penalty if I wait until I file my 2022 return and pay then. Is that correct?  If they would charge a penalty, how would they calculate the penalty?

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No, that's not correct. It doesn't mean 100% of the payment that was due with your 2021 tax return. It means 100% of the total tax on your 2021 tax return: line 24 on your 2021 Form 1040. To avoid a penalty, the total of your withholding and estimated tax payments for 2022 has to be at least 100% of the amount on your 2021 Form 1040 line 24. If your 2021 AGI (Form 1040 line 11) is more than $150,000 ($75,000 if married filing separately for 2022) you have to pay 110% of your 2021 tax.

The penalty calculation is very complicated. It's based on the amount of your underpayment and when you should have paid it. They will assume that you received your income evenly over the course of the year unless you fill out a special form with your 2022 tax return.

[NCperson]

@mitchden1 - 

100% of the tax shown on the return for the prior year

the tax is on Line 24 of form 1040; it has nothing to do with the refund. 

how would they calculate the penalty? again look at form 2210 and the instructions. 

[mitchden1]

For 2021, my total taxes due were $15,000. Based on my withholdings, I paid $15,500. so I received a refund of $500. To avoid a penalty in 2022, if I don't pay estimated taxes, the total amount of my 2022 withholding will be $17,000., which is more than 100% of my 2021 withholding. If I understand what you said,  I wouldn't be subject to any penalty. In 2021. Is this correct,

Also, how does the amount of the 2021 AGI enter into the calculation? My 2021 AGI was $149.5K.

Thanks again for your help.

[rjs · Accepted solution]

Based on the figures you have given, it's true that you would not have a penalty for 2022. But it's not because your 2022 withholding is more than your 2021 withholding. Your 2021 withholding has nothing to do with it. You have to compare your 2022 withholding to your 2021 total tax. If the total tax on Form 1040 line 24 of your 2021 tax return is $15,000, and your total 2022 withholding is $17,000, then you would not have any underpayment penalty for 2022 because your 2022 withholding is more than 100% of your 2021 total tax.

Where the 2021 AGI comes in is that your 2021 AGI determines whether the percentage of your 2021 tax that you have to pay is 100% or 110%. Since your 2021 AGI is just under $150,000 it is sufficient if your 2022 withholding is more than 100% of your 2021 total tax. If your 2021 AGI were over $150,000 your 2022 withholding would have to be at least 110% of your 2021 total tax (which would be $!6,500) in order to avoid a penalty.

If you have further questions, please give exact amounts from your 2021 tax return. You are close to some of the thresholds. We don't want you to come to a wrong conclusion because you relied on a rounded or approximate amount.

[mitchden1]

From my 2021 tax return, the total tax from Line 24 of the 1040, is $16,474. The AGI from Line 11 is $150,402. The total withholding for 2022 will be $20,150. If I understand you correctly, since my 2022 withholding will be $20,150. and that's 122.3% more than my 2021 total tax of $16, 474., there won't be any penalty. As long as the 2022 withholding is more than 110% of the 2021 total tax, there isn't any penalty.

Is this correct? The link you send me makes it very easy to ACH money to the IRS directly from my checking account. I will do that to reduce the amount that I will owe. When I do my 2022 tax return, Turbotax will give me the 2023 estimated quarterly tax payment forms. Can I make those payments from the same link and not use the forms? 

Thanks again for your help.

[rjs · Accepted solution]

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@mitchden1 wrote:

Is this correct?

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Yes.

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@mitchden1 wrote:

Can I make those payments from the same link and not use the forms? 

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Yes, you can do that.