Hello

I got fined by the IRS by withholding too little on my 2019 Federal taxes, and then when I filed my Federal for 2020, I had to pay 10k+ so I will get fined an Underpayment Penalty. I was busy/sidetracked last year so I could not get to it. Besides my wife and I both had new jobs and IRS changed their mode to withhold.

1. What is a good strategy for withholding so that I am about even by the end of the year? Assume no cap gains. I always seem to withhold too less lately. We are double income.
2. I just made a $7k payment so as to meet the April 15 deadline for Estimated Payments. I plan on making other payments every quarter. Which form is this entered in for IRS? Does IRS care about the date I paid or do they just want the total in 1040 Line 26?
3. Where does Line 26 link to as far as sub-forms go?

I have the same issue. I can think of 3 options
1) Guess your annual tax burden. Divide by number of paychecks and increase withholding to that amount
2) File your taxes quarterly
3) Blow it off and pay a couple hundred bucks annualy at tax time.

I always do option 3. My income is pretty variable and my taxes are very complicated. It's not worth the hassle of torturing myself 4 times per year.

The whole thing is stupid. I make quarterly estimated payments. In my 2020 filing, I was assessed a $1 penalty for underestimating, but I GOT A REFUND.

How can I underestimate and overpay?!

Is it possible you're overthinking it? Wouldn't [=(PY Amount You Owe - PY estimated payments) / 4] get you to your quarterly payment figure? Adjust if you do something like quit your job or increase capital gains etc. but you can't see the future.

1. Get a good accountant

thisguy05 said:

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The whole thing is stupid. I make quarterly estimated payments. In my 2020 filing, I was assessed a $1 penalty for underestimating, but I GOT A REFUND.

How can I underestimate and overpay?!

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Wow, very similar thing happened here.

Timber08 said:

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Is it possible you're overthinking it? Wouldn't [=(PY Amount You Owe - PY estimated payments) / 4] get you to your quarterly payment figure? Adjust if you do something like quit your job or increase capital gains etc. but you can't see the future.

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I'm trying to do this without making an estimated payment. Which means I have to withdraw at source as much as possible.

ORAggieFan said:

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1. Get a good accountant

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Sure, but I like to DIY as much as possible. This doesn't seem like a hard problem, so wondering if someone had a better plan than what I have.

ramblin_ag02 said:

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I have the same issue. I can think of 3 options
1) Guess your annual tax burden. Divide by number of paychecks and increase withholding to that amount
2) File your taxes quarterly
3) Blow it off and pay a couple hundred bucks annualy at tax time.

I always do option 3. My income is pretty variable and my taxes are very complicated. It's not worth the hassle of torturing myself 4 times per year.

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Yes, I thought of (1) above.
My wife joined a new company and they are taking out less than 1% from her salary as Fed Tax. I am going to get dinged. They are withdrawing 6.55% from my paycheck.

I wonder if I can just use our total tax charged from my 2020 tax return that I just filed (not much change since then), divide it by paycheck and just have them take out that amount every paycheck and forget about all the other weird calculations they do. Just a straight dollar amount probably will work best.

Two things

• Can your wife not change her W-4 at that employer? Is it a non W-4 job?
• Another way to think about it: Figure out your estimated tax bracket, look at what % of Federal tax that bracket owes, set aside that XX% every single paycheck into a separate account. Use that for estimated payments as well as the annual truing up.

infinity ag said:

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ORAggieFan said:

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1. Get a good accountant

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Sure, but I like to DIY as much as possible. This doesn't seem like a hard problem, so wondering if someone had a better plan than what I have.

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You're assuming this is a math equation and maybe it is:

X/42*637-8.5*3.1415926535897932384626433832795028841971693993751058209749445923078164062862089986280348253421170679+X^4

That's roughly the math of your taxes. A good accountant may show you you're paying too much in taxes. DIY may not yield those same results.

Easiest method (and cheapest if income is rising year over year) is Safe Harbor method. I've practiced this for several years now and haven't ever been penalized.

Calculating Estimated Tax Payments Safe Harbor Method

Another way individuals can avoid penalties is by pre-paying a "safe harbor" amount equal to 100% of the previous year's tax. The safe harbor amount for high income taxpayers is paying in 110% of the previous year's tax. A high income taxpayer is one whose previous year's adjusted gross income was $150,000 or more ($75,000 or more if you were married and filing a separate return).

Reference: https://www.dbbllc.com/newsletters/focus/aug2019/understanding-individual-estimated-income-tax-payments-and-safe-harbors

Once you hit estimated payments, I would look for a CPA. Absent that, there are a couple of quick things to mind. Generally, at the point you make a transition to quarterly payments you can go for the "oops" get out of jail free card. I had this happen. My underpayment was around $50,000 and they still waived.

After that, its really on you. No more I am sorry's without paying the penalty. Once you are required for estimated tax payments, (assuming you violated in 2020) the following year, your estimated for Jan 2012 through Mar 2021 is due Apr 15 2021, then April 2021 through May 2021 is due June 15, then June 2021 through Aug 2021 is due Sep 15 2021, then Sep 2021 through Dec 2021 is due Jan 15 2022.

https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2

Last note, you need to think about overestimating if you have a lot of variability. If you are less than 90% on that Jan 15 payment which is reasonable as you should no the cards by that date.

I would caution to not believe you can defer all payments until Jan 15 payment and "true it up". They will not appreciate that without a valid reason.

A more controversial approach would be to decide if you can make more in income with the money you "should" have paid in than what you'll owe in penalties. In other words if you owe $1000 in penalties on the $10,000 in taxes but can turn that $10,000 into $15,000 why not do that? Pay the tax and penalties on 10/15 and net $4000 profit.

I echo those who suggest you get a good CPA.

Our taxes are pretty complex...self-employment (my wife is a realtor), rental income, depreciation, K-1's, capital gains, etc. We've used the same CPA for years (even though we now live 900 miles from the Metroplex). Pretty simple...I scan and upload all our documents to Intuit. She downloads them, does our taxes, then sends us our estimated payments.

Four times a year I send a check to the IRS, and four times a year I send a check to the state where our rental property is (it's a state with an income tax). It's very seamless.

I get the DIY aspect, and at times I question the cost as a good CPA is not cheap. However, a good CPA is up to speed on changes in the tax code, and is aware of deductions or credits that are legal that I would have missed. Just my opinion.

I withhold how much I owed on the previous year to avoid paying the penalty. That system has worked out well for me usually being +/- a few hundred of what I owe each year.

I underpaid before and then went through the tax calculations to figure out what would be withheld on the w-4 elections, and what difference I needed to specify as additional withholding. I did this for both me and my wife's w-4.

It's really annoying and I wouldn't recommend everyone do it.

I thought you didn't pay a penalty as long as you paid at least what you paid the prior year.

Having a cpa is worth the money

ramblin_ag02 said:

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I have the same issue. I can think of 3 options
1) Guess your annual tax burden. Divide by number of paychecks and increase withholding to that amount
2) File your taxes quarterly
3) Blow it off and pay a couple hundred bucks annualy at tax time.

I always do option 3. My income is pretty variable and my taxes are very complicated. It's not worth the hassle of torturing myself 4 times per year.

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4) Prepay a portion of your taxes.

Rather than getting a return, we apply our return to next year. We don't have to worry about quarterly payments because we have a positive balance with the IRS.

I use a CPA. There a few things I don't personally want to f^ck with and taxes are one of them especially once your situation gets any kind of complex.

The right answer is the safe harbor answer above. If you pay in 110% of prior year's tax liability, you may still owe but you will not get hit with a penalty.

I pay an underpayment penalty every year.... but I'm not about to mess with taxes 4x a year, so I just never messed with quarterly payments. I usually try to make some kind of large payment right at the end of the year but its never enough and I always have the penalty.... I just pay it, there are so many other areas where I get roasted in taxes that paying a couple grand more doesn't really move the needle and in exchange I don't have to think about any of this crap during the year.