Taxes on 1099-INT

[TaxNoob18]

The past 5+ years, I normally owe the IRS between $500 to $1800 after reporting my W2, 1099INT/DIV. I never have to pay underpayment penalty. I made no changes on my W2 the past 5 years. Salary remains the same the last 5 years (no increase). The only big difference in 2023 is my 1099INT.

In 2023 interest hit the highest point which resulted in massive increase in my 1099-INT (it's likely triple/quadruple the amount I normally get). The total 1099 interest adds a huge amount to my AGI. I am sure I will owe the IRS taxes on my interest income and it's likely a lot (in the thousands). I have not started my 2023 yet so I don't know how much I owe.

Do I have to pay underpayment penalty?

[Mike9241]

There will be no federal penalties for not paying in enough taxes during the year if withholding and

1. timely estimated tax payments equal or exceed 90% of your 2023 tax or
2. timely estimated tax payments equal or exceed 100% of your 2022 tax (110% if your 2022 adjusted gross income was more than $150K) or
3. the balance due after subtracting taxes withheld from 90% of your 2023 tax is less than $1,000 or
4. your total taxes are less than $1,000

you do have the following options

A) for withholding the default is 1/4 of the annual total  is deemed paid each period, you can use actual amounts but if for one period it must be for all

B) you can use the annualized income method if that will produce a lower penalty

if you don't meet any of the exceptions in 1 to 4 above and neither options A or B eliminate the penalty then you will owe a penalty. Based on what you say is the cause, you don't have a reasonable cause for not meeting the exceptions. 

state laws differ

[VolvoGirl]

Maybe.  You should be sending in quarterly estimated payments to cover the interest income.

If you get a penalty, you might be able to eliminate it or at least reduce it. You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you. It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

[TaxNoob18]

Can TurboTax automatically calculate everything for me after inputting all my income and tell me if I need to pay penalty or not? I use the web version. My AGI is never over $100K (if that matters).

[VolvoGirl]

Yes it will figure the penalty automatically.  It will reduce a refund or add to a tax due.    But the amount Turbo Tax calculates (or doesn't) on your return line 38 is only an estimate. Turbo Tax can not figure it accurately because they don't know exactly when the IRS or state will get your return and tax due payment. It's common and normal and expected for the IRS or state to bill you for more or send you a refund.

[TaxNoob18]

I have no idea how to pay the IRS quarterly estimated payments. Never been in this situation in my life (interest is never this high). I did think about increasing my Federal withholding in 2023 to cover interest income but didn't do it. Thanks for the tip on how to eliminate/reduce the penalty.

[VolvoGirl]

If you end up owing too much Turbo Tax  should automatically prepare the 1040ES estimated payments for you.  They are optional to use and don't get sent with your return so the IRS won't be expecting them.

Or to prepare estimates for next year you need to be in your current return. But be careful not to change anything in your actual return.

In TurboTax Online, sign in to your account.
Select Tax Home in the left menu.
Scroll down to Your tax returns & documents.
Select 2023, and then select Add a State (you're not actually adding a state, this just gets you back into your return so you can make changes).

Go here,
Federal Taxes or Personal (Home&Business version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

Say No to W4. When you get to the W4 and Estimated Taxes section, say you want to adjust your income to go though all the screens.

[TaxNoob18]

Thank you very much for your quick replies. I'll come back to ask more questions when I start my 2023 return. Can't do it right now because I'm still waiting for a couple more 1099INT forms.

[TaxNoob18]

About this comment:

"You should be sending in quarterly estimated payments to cover the interest income."

Is there a specific rule that I must obey to know how much I'm supposed to pay? Can I just make some random guess, let's say pay the IRS $1000 every quarter? If I end up paying too much, will I get a refund next year when I file 2024 return? How do I report quarterly payments in Turbotax online? I've never done this in my life so I don't even know how to pay the IRS other than through (paycheck) tax withholding. So if I decide to pay them quarterly payments for tax year 2024, how do I do that?

My other option is to increase my tax withholding if I don't want to make quarterly estimated payments to the IRS, am I right? Sorry I ask so many questions. I'm clueless when it comes to this topic. Thanks again.

[VolvoGirl]

Yes you can just increase your withholding at work to cover the extra interest income.  You should do that.  Or you can send in some extra each quarter.  Either mail a check with a 1040ES form or you can pay the IRS directly online.  Then when you file your tax return you need to enter in any estimates you paid to get credit for them.  

To prepare or edit  estimates for next year you start with your current return, but be careful not to change anything.  If you can't get back into your return, Click on Add a State to let you back into your retun.

You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

Or Go to….

Federal Taxes or Personal (Deskop H&B)

Other Tax Situations

Other Tax Forms

Form W-4 and Estimated Taxes - Click the Start or Update button

And in the Desktop program you can switch to Forms and open the Estimated Tax Payments Options sheet.  You can even select to print the estimates with just your personal info and no amounts.  You  can play with and tweak the amounts.  You can open the individual 1040ES forms and override the amounts.  

See,

https://ttlc.intuit.com/community/tax-payments/help/can-turbotax-calculate-next-year-s-federal-estim...

You must make quarterly estimated tax payments for the current tax year if both of the following apply:

- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:

    90% of the tax to be shown on your current year’s tax return, or

  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months).

Here are the blank Estimates and instructions (the actual 1040ES forms are at the very bottom so scroll way down)

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

You can pay directly on the IRS website https://www.irs.gov/payments

Be sure to pick the right kind of payment and year.....2024 Estimate

[BillM223]

Is there a specific rule that I must obey to know how much I'm supposed to pay?  Sort of, see below.

Can I just make some random guess, let's say pay the IRS $1000 every quarter? You should aim to pay either as much tax as you did the year before, or to come within $1,000 of what your final tax bill will be.

If I end up paying too much, will I get a refund next year when I file 2024 return? No, you will get a refund as part of the 2023 processing.

How do I report quarterly payments in Turbotax online? Go to Payments. If you look around a bit, you'll see that you can make quarterly payments here online.

I've never done this in my life so I don't even know how to pay the IRS other than through (paycheck) tax withholding. So if I decide to pay them quarterly payments for tax year 2024, how do I do that? See the answer above.

[TaxNoob18]

Thank you VolvoGirl for your quick replies. There's load of info and I'm slow. Need time to digest all that information. Thanks again.

[TaxNoob18]

Q: If I end up paying too much, will I get a refund next year when I file 2024 return?

A: No, you will get a refund as part of the 2023 processing.

I think you misunderstand my question. I did not make quarterly payments in 2023 at all.

The question is about quarterly payments in 2024. It does sound more complicated than increasing my withholding.

[VolvoGirl]

But YES you will get a refund on your 2024 return if you pay in more from withholding and estimates than the 2024 total tax.  

[BillM223]

Sorry, I took your question to mean if you overpay in 2023, would you get the refund on your 2024 return.

If you already have other withholding, then that would be absolutely fine (normal, even) to increase it to cover the additional tax for your interest.