Underpayment Penalty Avoidance

[Sweet300]

I am looking for advice on how to avoid underpayment penalties on my 2025 taxes.   I found the following safe harbor rules to avoid underpayment penalties on IRS.gov:

• Your filed tax return shows you owe less than $1,000 or 
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2024 was more than $150,000 ($75,000 if your filing status for 2025 is married filing separately), substitute 110% for 100%. 

Can someone please confirm I am interpreting these thresholds correctly under the following situation? 

• Filing Married Jointly in 2025 with 2024 AGI over $150,000 

• Owed $120,000 federal income taxes in 2024 

• Estimated to owe $180,000 in 2025 

• 2025 withholding will not result in a tax return showing less than $1,000 owed 

If quarterly estimated payments and wage withholding throughout the 2025 total $132,000 or great, then no underpayment penalties will be charge because 110% of 2024’s taxes [$120k * 110% = $132k] are less than 90% of 2025’s taxes [$180k * 90% = $162k]. 

Thanks in advance. 

[fanfare]

IRS requires you to establish your Required Annual Payment for the year and pay as you go.

You can base your estimate on prior year's tax , or 90% of this year's tax, whichever is smaller.
Each period your withholding and estimated tax paid must be at least 25% of the estimate, even if your income is uneven. [Otherwise, you will be penalized.] this is the simplified method, default.
Payments above 25% are carried into the next period.
if your estimate is based on this year's tax and turns out to be wrong you may be penalized.
you can compensate by overestimating.
if your estimate is based on prior year's tax, you know that when you file by April 15, which is also the first estimated tax payment due date. How convenient.

The first two estimated payment dates  have passed so if nothing has been done you may be penalized under the simplified rule.

@Sweet300 

For the other more complicated rule, see Form 2210 Schedule AI.

[baldietax]

You got it, but beware payment timing.  To see this calculation see lines 1-9 of Form 2210.

In your situation with significant increase in tax from year to year you can pay estimated tax based on prior year tax.  The only variable from 2025 that matters in that case is any withholding.  But the tax has to be paid "timely" - quarterly for estimated taxes; withholding is regarded as timely by default (the total is divided by 4).  When you filed for 2024 using TT it would have generated ES vouchers by default based on prior year tax and assuming 2025 withholding will be the same as 2024.

Subtract your estimated withholding from the 132k and divide what is left by 4, that's the quarterly payment you need to make / should have made.  If you didn't pay this in Q1 and Q2 you will be accruing penalty but you can stop the penalty growing if you pay that in Q3 i.e. by Q3 deadline you need to have paid 75% of that annual ES total and the remaining 25% in January 2026, and the balance due on your return in April 2026.

The penalty rate is 8% annually, but would be applied on 25% of the missed ES since Q1 for a few months until you pay it, 25% of the missed ES since Q2, so the penalty is probably not too bad as long as you get the ES caught up.

You can also increase withholding to meet more of what is due during the year and reduce the portion due from estimated tax payments, but you only only 6 months left for that to apply.

[Sweet300]

Thank you both.

[baldietax]

@Sweet300 was looking back at this thread and just wanted to clarify, if you have ES due from Q1/2 you need to pay those ASAP to stop the penalty accruing and not wait until Sep - the Sep Q3 deadline is for the Q3 portion of the ES.