Safe Harbor and year 2

[jriker1]

I have been growing my nest egg in savings accounts for years now and eventually decided I wasn't being smart with my money and should take advantage of the market to grow thing faster.  Did this years ago but stopped for various reasons or lessoned.  This last year I started investing in some moderate dividend ETFs and stocks.  Last year I made basically salary and minimal interest.  I'm going to make up numbers here.

So let's say I made $160k in salary last year and I had to pay a total in taxes of $30k.  Based on the safe harbor info I understand I need to pay $30k in taxes this year plus 10% for a high earner.  So as long as I paid $33k in taxes this year won't get dinged even though my income may have almost doubled this year in dividends.

So I do my taxes and obviously not sure what it will be right now but let's say I owe an additional $25k in dividend taxes.  I pay the additions but don't get dinged because I did my 10% over last year.

Is it safe to say that the safe harbor concept is basically not super value add go forward?  I know in theory with DRIP my dividends will potentially grow, but over the course of a year won't grow that much so basically I will need to almost pay the full tax amount next year since I'd be talking about $30k plus $25k or $55k in taxes this year so would have to at least pay $60,500 in taxes by the end of 2026 with the additional 10%?

[baldietax]

Yes the safe harbor helps when you have a significant increase in income.  You could win the lottery and still not have a penalty or owe tax until April as long as you met the prior year safe harbor.

When your income is then steady from year to year you would more likely benefit from paying 90% of current year tax (estimated) rather than 110% of prior year and it's time to just set up quarterly estimated tax payments.  you can always adjust the quarterly ES down later in the year if your estimates come in lower, but can't increase them later in the year to make up for earlier quarters.  To the extent you can increase withholding that will reduce the ES due if needed.  When you do your 2025 filing you can adjust the 2026 estimates and optimize the ES vouchers under Other Tax Situations / Form W4 and Estimated Taxes section.

Form 2210 is helpful to review, lines 1-9 have the safe harbor calc.  It's not normally filed unless you opt for one of the exceptions (e.g. AI method) and won't appear in the forms list by default on TT desktop but if you double click thru line 38 on 1040 and again on the worksheet it will show 2210.

[Mike9241]

It's a personal decision as to whether to meet the safe harbor requirements. I had taxpayers that preferred to pay the penalties for one reason or another. economically, it's what you earn on the taxes not paid vs what's earned on that money after taxes and penalties.

there are other ways to avoid or reduce underpayment of estimated tax penalties 

1) 90% of the current year tax. 

2) annualized installment method

3) some taxpayers can control their withholding and may under-withhold early in the year and over-withhold later in the year. sometimes this is normal due to year-end bonuses. taxpayers have the choice of reporting withholding as 1/4 each period or the actual amount.