Author Topic: Underpayment Penalty  (Read 934 times)

felizcortez

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Underpayment Penalty
« on: May 08, 2018, 03:39:37 PM »
I received a bill from the IRS today stating that I owed another ~$100 for failure to pay proper estimated tax penalty in 2017. 

I ended up owing about $19k in taxes this year.  A large part was due to my wife's job not taking very many taxes out of her paycheck and then ~$15k of dividends throughout the year.  I'm debating on whether it makes more sense to do quarterly estimated payments or just have my work take a set $500 or so out of each paycheck for the rest of the year to cover these types of things.

Any thoughts?

MustacheAndaHalf

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Re: Underpayment Penalty
« Reply #1 on: May 09, 2018, 12:15:13 PM »
Before you try and earn that $100, picture what's required.  You need to divide up all income and gains into 4 separate time periods, and then fill out your taxes 4 times.  I once made the mistake of starting that process with tax software, which convinced me the level of data entry / paperwork wasn't worth it.  So take a peek at that, and decide if it's even worth $100 assuming you'd get all of that $100 back.

Only $100 when you owed $19,000?  If your income changed a lot from one year to the next, the IRS might have only charged a penalty on part of your taxes owed.  The penalty might be larger if your income/dividends are more stable between last year and next year.  You might want to make an effort to address the ongoing situation, not just saving the $100 penalty.

The IRS has a direct pay system that makes payment easy.  Search for "IRS direct pay" to find details and how they can automatically draw the money you specify out of your bank.

Back to that $100 penalty, consider that you'll have to fill out your taxes 4 times.  You need to divide up all your income and dividends into 4 separate tax returns, one per quarter.  One year in your situation, realizing they wanted me to do that tax interview 4 times instead of once, I decided it wasn't worth it.  You might not even get all of the $100 penalty back.

But $100 is surprisingly low for $19,000 underpayment, so I suspect their are mitigating factors that might not be present next year.  It might be worth a closer look, or just using "IRS direct pay" to make an estimated payment.

MDM

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Re: Underpayment Penalty
« Reply #2 on: May 09, 2018, 12:31:22 PM »
Before you try and earn that $100, picture what's required....
This is all about Schedule AI on Form 2210, correct?

One can avoid all that by simply using withholding (provided withholding is an option, as it appears to be for the OP) instead of estimated payments, and doing enough withholding to satisfy one of the safe harbor rules - in other words, not having to pay estimated tax per the link given.

felizcortez

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Re: Underpayment Penalty
« Reply #3 on: May 09, 2018, 12:38:57 PM »
Before you try and earn that $100, picture what's required.  You need to divide up all income and gains into 4 separate time periods, and then fill out your taxes 4 times.  I once made the mistake of starting that process with tax software, which convinced me the level of data entry / paperwork wasn't worth it.  So take a peek at that, and decide if it's even worth $100 assuming you'd get all of that $100 back.

Only $100 when you owed $19,000?  If your income changed a lot from one year to the next, the IRS might have only charged a penalty on part of your taxes owed.  The penalty might be larger if your income/dividends are more stable between last year and next year.  You might want to make an effort to address the ongoing situation, not just saving the $100 penalty.

The IRS has a direct pay system that makes payment easy.  Search for "IRS direct pay" to find details and how they can automatically draw the money you specify out of your bank.

Back to that $100 penalty, consider that you'll have to fill out your taxes 4 times.  You need to divide up all your income and dividends into 4 separate tax returns, one per quarter.  One year in your situation, realizing they wanted me to do that tax interview 4 times instead of once, I decided it wasn't worth it.  You might not even get all of the $100 penalty back.

But $100 is surprisingly low for $19,000 underpayment, so I suspect their are mitigating factors that might not be present next year.  It might be worth a closer look, or just using "IRS direct pay" to make an estimated payment.

Agree completely, it's not worth the effort to go back and argue this for $111.  I paid the bill this morning, and added another 500 bucks a paycheck (1k per month) to my with holdings to see if that ends up satisfying the tax bill this year.  My wife's income will drop this year, because she is no longer working, but we still have large dividend checks and interest that ends up paying out quarterly.  I've put in about as much effort as I'm willing to do to try to save 100 bucks. 

PathtoFIRE

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Re: Underpayment Penalty
« Reply #4 on: May 09, 2018, 02:14:52 PM »
Summarizing, in order to owe an underpayment penalty, you and your spouse must have
1. total federal income tax owed must have been $1k+ what you paid/withheld
2. paid less than 90% of what you owed
3. paid less than 100% of what you owed in 216 (110% for high income, defined as $150k for 2017, not sure what 2016 number was, probably the same)

I personally aim to hit number #2 every year, and periodically update a spreadsheet which ballparks our expected federal income tax.

You mention losing your spouse's income for this year, so it's probably not in your best interest to aim for #3 as you will likely overpay, maybe by a lot. I'm only in total market mutual funds, so I estimate dividends by assuming 2% of my taxable accounts, your math may be more complex if you hold individual stocks/bonds. Plug that into some tax estimator along with your expected pay, work deductions, etc. (I use a google sheets doc of my own making, Taxcaster is not a bad place to start if you want a quick and dirty estimate), figure out what you should owe, and aim to hit it or go a little over, and you should have no problems.

felizcortez

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Re: Underpayment Penalty
« Reply #5 on: May 09, 2018, 04:24:50 PM »
Summarizing, in order to owe an underpayment penalty, you and your spouse must have
1. total federal income tax owed must have been $1k+ what you paid/withheld
2. paid less than 90% of what you owed
3. paid less than 100% of what you owed in 216 (110% for high income, defined as $150k for 2017, not sure what 2016 number was, probably the same)

I personally aim to hit number #2 every year, and periodically update a spreadsheet which ballparks our expected federal income tax.

You mention losing your spouse's income for this year, so it's probably not in your best interest to aim for #3 as you will likely overpay, maybe by a lot. I'm only in total market mutual funds, so I estimate dividends by assuming 2% of my taxable accounts, your math may be more complex if you hold individual stocks/bonds. Plug that into some tax estimator along with your expected pay, work deductions, etc. (I use a google sheets doc of my own making, Taxcaster is not a bad place to start if you want a quick and dirty estimate), figure out what you should owe, and aim to hit it or go a little over, and you should have no problems.
[/quot

We had an AGI of about $430k last year and my wife's income was about 10k of that, but only about $200 of taxes were withheld from her paychecks so we ended up owing a decent chunk from her salary.  Total Tax owed was $111k and total tax paid with payrole deductions was $91.8k.  So I needed to pay right around 100k in taxes in order not to be hit with the preparment penalty to get under the 90% of taxes paid. 

2016 Taxes - AGI of $413k with taxes owed of 105.7k and taxes paid via payroll deductions of 94.5k

Not quite sure how the paid less than 110% of what I owed in 2016 works.  It looks like I'd violate that as well.  So to not get hit by the penalty, assuming my numbers stay roughly the same for next year, I'd need to pay at least $111k to avoid being hit with a penalty?


MDM

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Re: Underpayment Penalty
« Reply #6 on: May 09, 2018, 05:56:27 PM »
Summarizing, in order to owe an underpayment penalty, you and your spouse must have
1. total federal income tax owed must have been $1k+ what you paid/withheld
2. paid less than 90% of what you owed
3. paid less than 100% of what you owed in 216 (110% for high income, defined as $150k for 2017, not sure what 2016 number was, probably the same)

I personally aim to hit number #2 every year, and periodically update a spreadsheet which ballparks our expected federal income tax.

You mention losing your spouse's income for this year, so it's probably not in your best interest to aim for #3 as you will likely overpay, maybe by a lot. I'm only in total market mutual funds, so I estimate dividends by assuming 2% of my taxable accounts, your math may be more complex if you hold individual stocks/bonds. Plug that into some tax estimator along with your expected pay, work deductions, etc. (I use a google sheets doc of my own making, Taxcaster is not a bad place to start if you want a quick and dirty estimate), figure out what you should owe, and aim to hit it or go a little over, and you should have no problems.

We had an AGI of about $430k last year and my wife's income was about 10k of that, but only about $200 of taxes were withheld from her paychecks so we ended up owing a decent chunk from her salary.  Total Tax owed was $111k and total tax paid with payrole deductions was $91.8k.  So I needed to pay right around 100k in taxes in order not to be hit with the preparment penalty to get under the 90% of taxes paid. 

2016 Taxes - AGI of $413k with taxes owed of 105.7k and taxes paid via payroll deductions of 94.5k

Not quite sure how the paid less than 110% of what I owed in 2016 works.
You owed $105.7K in 2016.  If you had withheld 110% * $105.7K = $116,270 in 2017, there would have been no penalty regardless of your income and tax owed.

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So to not get hit by the penalty, assuming my numbers stay roughly the same for next year, I'd need to pay at least $111k to avoid being hit with a penalty?
If they are exactly the same (unlikely due to the new law, but we're just doing "for example"), so your 2017 federal tax bill is $111,000, then you could avoid a penalty by withholding
1. $110,001 (so you would owe only $999 when filing)
2. $99,901 (so you had withheld >90% of your 2017 bill)
3. $122,101 (so you had withheld more than 110% of last year's bill).

Because you need satisfy only one of the criteria, withholding $99,901 would suffice.

Padonak

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Re: Underpayment Penalty
« Reply #7 on: May 09, 2018, 07:43:44 PM »
How much penalty will I have to pay if I owe lets say 5K in taxes in 2018? I always overpaid taxes in previous years. This year, I  added two allowances to the paycheck to avoid overpaying. However, i expect to earn about 6K or more from side hustles and probably the same from taxable dividends this year. Should i preemptively remove one or even two allowances from payroll so that i get paid less now but will less likely to owe income tax?

What about FICA payments for side hustle income? Will I have to pay penalties for FICA payments as well if I don't pay quarterly estimated FICA contributions?

MDM

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Re: Underpayment Penalty
« Reply #8 on: May 09, 2018, 09:22:56 PM »
How much penalty will I have to pay if I owe lets say 5K in taxes in 2018?
Depends on a few things.  See line 15 on Form 2210 and work back from there.  A quick estimate is $5K * 0.02660 = $133, assuming you do pay all you owe by the April filing deadline.

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I always overpaid taxes in previous years. This year, I  added two allowances to the paycheck to avoid overpaying. However, i expect to earn about 6K or more from side hustles and probably the same from taxable dividends this year. Should i preemptively remove one or even two allowances from payroll so that i get paid less now but will less likely to owe income tax?
Depending on whether you prefer web site Q&A or spreadsheet input, see IRS Withholding Calculator or the withholding calculations in the case study spreadsheet (see Instructions!A57 for instructions).

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What about FICA payments for side hustle income? Will I have to pay penalties for FICA payments as well if I don't pay quarterly estimated FICA contributions?
Yes, self-employment tax counts as a required tax amount.  See line 2 of Form 2210.