underpayment (or overpayment)

[sfvoyage]

My income is largely derived from investments and fluctuates from year to year.

For IRS, I understand that if I pay 110% of my current tax due towards next year's estimated taxes, I will not owe any underpayment penalty or interest charges, if any.

Is that also true for California Franchise Tax Board?  By paying 110% of my current tax due towards next year's estimated taxes, I will not owe any underpayment penalty or interest charges, if any, for California. 

[Katherine S 63]

Great question!!

Here is the information from CA:

Who must pay

Generally, you must make estimated tax payments if in 2022 you expect to owe at least:

• $500
• $250 if married/RDP filing separately

And, you expect your withholding and credits to be less than the smaller of one of the following:

• 90% of the current year’s tax
• 100% of the prior year’s tax (including alternative minimum tax)

For more information go to:

https://www.ftb.ca.gov/pay/estimated-tax-payments.html#:~:text=for%20more%20information.-,Who%20must...

I sure hope this has been helpful.

If you reply back, I will try to keep an eye open to assist further.

Please give me a thumbs up if this was helpful.

Katie S.

[Tanisha EA]

Yes, CA follow's a similar calculation as well.  I found this on California's website.

Generally, you must make estimated tax payments if in 2022 you expect to owe at least:

• $500
• $250 if married/RDP filing separately

And, you expect your withholding and credits to be less than the smaller of one of the following:

• 90% of the current year’s tax
• 100% of the prior year’s tax (including alternative minimum tax)

https://www.ftb.ca.gov/pay/estimated-tax-payments.html

[evelynm]

Hello: 

TurboTax now has a great investment/capital gains tax calculator:   

https://blog.turbotax.intuit.com/income-and-investments/capital-gains-tax-calculator-48615/

This is a simple tool to help with your gain/loss calculations.

Yes you are correct on the IRS - however; there are two methods:   

The requirements are that you pay:

• 90% of the tax you owe for the current year. Estimate what you'll owe and pay at least 90% of this amount by making timely quarterly estimated tax payments or through paycheck withholding.
• 100% (or 110%) of last year's tax bill. Pay 100% of the tax shown on your prior-year tax return before applying estimated payments, withholding, or refundable tax credits. If your adjusted gross income is more than $150,000 (or $75,000 if you're married and file a separate return from your spouse), the safe harbor is 110% of your prior-year tax.
• https://turbotax.intuit.com/tax-tips/irs-letters-and-notices/guide-to-irs-tax-penalties-how-to-avoid...

As far as California:   

Generally, you must make estimated tax payments if you expect to owe at least $500 ($250 if married/RDP filing separately) in tax for 2022 (after subtracting withholding and credits) and you expect your withholding and credits to be less than the smaller of:

1. 90% of the tax shown on your 2022 tax return; or
2. 100% of the tax shown on your 2021/2022 tax return including Alternative Minimum Tax (AMT). 

[sfvoyage]

Thanks. 

I take it that the IRS 110% "safe harbor" rule means that if I pay 110% of my current year's tax due, I will not be subject to any underpayment penalty or interest for my next year tax liabilities.  Is that right?

I'm still looking for the answer regarding if California has the same 110% safe harbor rule.

[Katherine S 63]

https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

Above is the link to the IRS information on estimated payments.

This section is the part that I think will help you the most:

Penalty for Underpayment of Estimated Tax

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. 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. There are special rules for farmers, fishermen, and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts (or Form 2220, Underpayment of Estimated Tax by Corporations), to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 and 1040-SR Instructions or Form 1120 InstructionsPDF, for where to report the estimated tax penalty on your return.

The penalty may also be waived if:

• The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
• You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

If you reply back, I will try to keep an eye open to assist further.

Please give me a thumbs up if this was helpful.

Katie S.

[evelynm · Accepted solution]

How to calculate estimated tax payments for 2023 California?

Individuals who are required to make estimated tax payments, and whose 2022 California adjusted gross income is more than $150,000 (or $75,000 if married/RDP filing separately), must figure estimated tax based on the lesser of 90 percent of their tax for 2023 or 110 percent of their tax for 2022 including AMT.