AMT and avoiding penalty w/ Safe Harbor

[den]

Hi everyone!

- Married filing jointly, DINKs.
- 401k and Roth IRAs are maxed out.
- Filing taxes 4th time in the US.
- Both W-4s have 1 withholding (standard for DINKs?)

In 2016 I paid ~10K in April to IRS because of outdated W-4 (my bad). Got penalized $85 for that.

This year, I'm looking at a bigger AGI AND highly likely AMT (exercised some ISO options).

I took YTD Federal Taxes Paid from our paychecks and projected them towards the whole year. We are on the path of paying > 100% of what we paid in 2016.

I sum up: Federal Taxes + Social Security + Medicare = Total Federal Tax withheld. Please correct me if I'm wrong with this calculation.

Assuming we pay >= 100% of what we paid in 2016, I see us in the Safe Harbor and we cannot be penalized by the IRS for not withholding enough.

Does this matter at all if I expect to be taxed under AMT in 2017?

The intent is to pay just enough to not be penalized, and, generally, play it nice.

Thanks!

[MDM]

I sum up: Federal Taxes + Social Security + Medicare = Total Federal Tax withheld. Please correct me if I'm wrong with this calculation.

SS & Medicare do not count.

Assuming we pay >= 100% of what we paid in 2016, I see us in the Safe Harbor and we cannot be penalized by the IRS for not withholding enough.

Does this matter at all if I expect to be taxed under AMT in 2017?

Whether or not AMT is incurred is irrelevant.  Also, you may need to withhold 110% of last year's tax if your income is high enough.

See Publication 17 (2016), Your Federal Income Tax for the safe haven possibilities (i.e., the opposite of having to pay estimated tax).

[den]

Thank you!

Indeed I found 110% on the linked page under "What's new for 2017":

Estimated tax safe harbor for higher income taxpayers. If your 2016 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2017 or 110% of the tax shown on your 2016 return to avoid an estimated tax penalty.

That means I will need to do additional withholdings for the remaining 6 months.

Question answered!

On a somewhat related topic: $85 penalty for a 10K underpayment is not much if I can "use" the money meanwhile. I failed to find any brackets for penalties. If I get hit again - would it be ~$85 or more like $500 because of repeated underpayment? Is there a way to predict?

[MDM]

On a somewhat related topic: $85 penalty for a 10K underpayment is not much if I can "use" the money meanwhile. I failed to find any brackets for penalties. If I get hit again - would it be ~$85 or more like $500 because of repeated underpayment? Is there a way to predict?

See 2016 Form 2210 - f2210.pdf and 2016 Instructions for Form 2210 - i2210.pdf.  2017 may differ slightly.

Probably a good spreadsheet task if you want to do the 2210 calculations yourself.

[den]

I pay the underpayment penalty every year.  It's based on a percentage of what you owe, and it's a very small percentage.  The penalty does not get worse if you owe it every year.  As you saw $85 on 10k is less than 1%.  You can make most of that back by  leaving the money in a savings account.  It's hard to calculate since it's 3.5 full months plus some average of 12 months.  I cut the year in half and call it 9.5 months total.  The penalty seems reasonable enough that I haven't bothered to increase my withholding.  Not sure why it's called a penalty- it's basically interest.

This is exactly the answer I was looking for - "how bad it is" from personal experience :) Spreadsheets may yield a number, and when there is no one with experience to verify correctness, it doesn't keep me sane.

Why paying AMT (which is completely separate calculation and can differ drastically from 110% of 2016) will not draw penalty obsolete - not clear...

[MDM]

Why paying AMT (which is completely separate calculation and can differ drastically from 110% of 2016) will not draw penalty obsolete - not clear...

Whether Line 45 of 2016 Form 1040 - f1040.pdf is zero or not zero is irrelevant because 2016 Form 2210 - f2210.pdf starts with Line 56 of Form 1040.

Is that what you were asking?

[den]

Why paying AMT (which is completely separate calculation and can differ drastically from 110% of 2016) will not draw penalty obsolete - not clear...

Whether Line 45 of 2016 Form 1040 - f1040.pdf is zero or not zero is irrelevant because 2016 Form 2210 - f2210.pdf starts with Line 56 of Form 1040.

Is that what you were asking?

Yes. So to sum up my understanding:
1. Fill in 1040, get 2 numbers: Tax and AMT
2. Disregard whichever is used, form 2210 is in effect with the same definition of penalty/safe harbor

Example I have in mind:
1. In 2016, paid $X in tax
2. In 2017, withheld 110% of $X (safe harbor for AGI > $150K)
3. In 2017, also exercised some options and AMT = (110% of $X) + $Y
4. I cannot be penalized for underpayment of $Y (be it a $1K or $100K)

Frankly, not having year-end Fair Market Value for the stock makes it impossible to predict the spread and, as a result, $Y. So there no point guessing unless I want to save extra to pay to IRS in April.

[MDM]

Yes. So to sum up my understanding:
1. Fill in 1040, get 2 numbers: Tax and AMT
2. Disregard whichever is used, form 2210 is in effect with the same definition of penalty/safe harbor

On 1040, the AMT number is the difference between the AMT calculated on form 6251 and the tax calculated on line 44 of form 1040.  Or close enough: see line 35 of 2016 Form 6251 - f6251.pdf.

Example I have in mind:
1. In 2016, paid $X in tax
2. In 2017, withheld 110% of $X (safe harbor for AGI > $150K) Bingo! We have a winner!
3. In 2017, also exercised some options and AMT = (110% of $X) + $Y
4. I cannot be penalized for underpayment of $Y (be it a $1K or $100K)

Correct.

You could add
  3.5 In 2017, won $100 million in a lottery so "regular" 1040 tax was higher than AMT, and
you still would not be penalized due to #2.

[den]

Bingo! We have a winner!

Dunno how to react really...

Anyway, I appreciate your answers - hopefully others in my situation would be able to find this thread useful.

Happy 4th of July! Time to step away from the keyboard.

[MDM]

Bingo! We have a winner!

Dunno how to react really...

Anyway, I appreciate your answers - hopefully others in my situation would be able to find this thread useful.

Happy 4th of July! Time to step away from the keyboard.

That meant "this is exactly the right thing to do, and protects you against underpayment interest no matter how much you make in 2017."  Sorry if you thought it ambiguous - it was purely complimentary.