Tax Year 2025 Projections vs Penalty

[chuckz]

Must admit I am still a bit of a novice in avoiding tax penalties.  Over the past three years I have avoided a tax penalty in 2 of the 3 years ($70 in 2023).  This week I tried to use the IRS calculator to project my tax liability for 2025.  I question the result as it computed a refund (HIGHLY unlikely) as it does not account for social security.  (Social security was not offered as a choice as it was blacked out). Soooo, I once again reverted to a stubby pencil drill.  We are into our early 70's so here is how I determined my potential tax bill.  I (1) added all income projections to include interest from CDs; (2) computed annual taxes I will pay based upon a summation of all the monthly tax payments from pensions and social security;  (3) subtracted the standard deduction of $33,200 for TY 2025 (as we have no other deductions). I then compared the taxes I will pay for the year to what I project my tax bill for 2025 to be based upon the IRS table that computes taxes for my salary range to be $11,157 plus 22% of remaining income over $96,950.  If I made that easy enough to follow, I believe I will remain penalty free as long as the taxes I pay are at least 90% of the computed projection.  Stated more simply, IF MY TAX PROJECTION COMPUTES OUT TO BE $30K, I WILL BE PENALTY FREE SO LONG AS THE TAXES I PAID THROUGHOUT THE YEAR EQUAL AT LEAST  $27K (90% of $30,000).  If true, I should be good until the year after I turn 73 and my RMDs kick in.  Looking ahead, what is the best way to combat increased income and the resulting tax liability due to RMDs? Pay quarterly tax estimates?  Thanks.

[Vanessa A]

Yes, you are correct.  As long as you pay 90% of your tax liability in quarterly payments during the year, you will avoid the tax penalty for underpayment. 

As for combatting increased income and increased tax liability, that can be rather difficult once you are no longer eligible for retirement contribution distributions. Taxes simply put, comes down to your total income and deductions and credits. Some things that can potentially give you tax credits to lower the liability would be as follows:

• The Residential Energy Credit- If you made certain home improvements such as adding solar to your home, you could claim a credit of 30% of the total cost of the project.  This is a non refundable credit, however, it can be carried forward until 2032 when the credit is set to expire or until used up whichever comes first. 
• Home Improvement Energy Efficient Credit- if you make improvements like replacing your windows, heating or air system, or heat pumps, you can claim up to $3,200 in credits.
• Purchase an Electric Vehicle that qualifies for the EV Credit-New.  If you are married filing jointly, the income limit is capped at $300,000 and is worth up to $7500. 

With your standard deduction so high, any itemized expenses would be hard to be greater than your standard deduction.  So other than a large donation to charity, you would not likely benefit from any itemizable expenses if you are not already able to benefit from them. 

[fanfare]

A;though you may have difficulty prjecting your 2025 income and tax, or get an unexpected income windfall,

you do know your 2024 tax.

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What is your 2024 tax ? do you have withholding taken in 2025?
If your total 2025 withholding alone is 100 % of that amount ( 110% if your 2024 AGI is over $150,000),

you don't need to make estimated tax payments. This is the prior year's tax rule.

If you got a 2024 refund this year and 2025 earnings are comparable then your 2025 withholding may already meet the prior year's tax rule
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[If IRAs or 401k are involved, one possible action is to make sure your withholding instruction to custodian on IRA distribution specifies the needed withholding to satisfy the above rule.]]

@chuckz 

[chuckz]

Hi fanfare,

Thank you for the prompt reply.  Please allow me back brief to see if I understand.

My AGI for 2024 was below $150 K.  Say my taxes for 2024 were $21,500 and my projected withholdings for 2025 are $21,000.  If I understand your response, I do not need to make any estimated tax payments if my withholding were $21,500 ($500 more).  That said, I could eliminate the need for estimated tax payments just by increasing my withholdings on one of my pensions by at least $500 or even $1000, just to provide a bit of a cushion.  Am I tracking?

If the above is correct, what happens if my AGI for 2025 exceeds $150,000 and the resulting tax liability exceeds my projection by $4,000 or $5,000?  I will have a hefty tax payment due upon filing, but will I pay a penalty for underpayment?  Based upon the prior year's tax rule I do not think so.

Given the above tax bill due at filing for 2025, what is the impact in 2026?  Will my 2026 withholding projections need to equal 110% of my tax liability in 2025 to avoid estimated tax payments?  Wash, rinse, repeat.

Still have 2 years before I have to worry about the impact of RMDs so that will be something down the road.

Thanks for your time and the assist.

Chuck