Underpayment Penalty

[Nevaco]

Hi all, very much appreciate your wisdom on this!

DW and I are fortunate to have a much higher taxable income this year (~$110,000) than last year (~$72,000). Much of the difference has been due to working multiple jobs (all W-2), so I'm worried that our withholding hasn't been sufficient to avoid an underpayment penalty. However, I read about a "safe harbor" approach and I want to make sure I understand it correctly.

Safe Harbor: Withholding in current year greater than 100% of taxes due in the prior year is sufficient to avoid an underpayment penalty (found here: https://www.hrblock.com/tax-center/irs/tax-responsibilities/avoiding-underpayment-tax-penalty/).

Questions:

1. Am I understanding the safe harbor correctly in that if we owed $8,200 in federal tax in 2019, so long as we have $8,201 withheld from our paychecks in 2020 we won't be at risk of a federal underpayment penalty?

2. Does Virginia have any similar safe harbors available for state income tax? I wasn't able to find much about it online, particularly regarding personal income tax rather than business income tax. If not, we have some savings I can use to make an estimated payment but I'd rather avoid that if possible.

Thanks so much for your input!

[secondcor521]

1.  Generally correct.  Note that if your income last year had been high enough, the 100% number would have been 110%.  Also note that there are several other safe harbor rules, but the one you're referring to looks like it will work for you.

2.  It appears so.  Go to this link - https://www.tax.virginia.gov/sites/default/files/vatax-pdf/2019-760-instructions.pdf - and look at the instructions for line 18 "Addition to tax" on page 23 of that document.  The second bullet point there seems to apply to you and your DW.

[Nevaco]

Thanks, secondcor521. Good to know we won't have to worry about a penalty. I've bookmarked the link you provided to hopefully answer any simple questions like this one on my own in the future.

[secondcor521]

Thanks, secondcor521. Good to know we won't have to worry about a penalty. I've bookmarked the link you provided to hopefully answer any simple questions like this one on my own in the future.

Sure.  Note that the link I gave is to the 2019 instructions.  State legislatures change their tax rules pretty regularly, so you'll want to refer to the current year for the most up-to-date rules.

[phildonnia]

Hi all, very much appreciate your wisdom on this!

DW and I are fortunate to have a much higher taxable income this year (~$110,000) than last year (~$72,000). Much of the difference has been due to working multiple jobs (all W-2), so I'm worried that our withholding hasn't been sufficient to avoid an underpayment penalty. However, I read about a "safe harbor" approach and I want to make sure I understand it correctly.

Safe Harbor: Withholding in current year greater than 100% of taxes due in the prior year is sufficient to avoid an underpayment penalty (found here: https://www.hrblock.com/tax-center/irs/tax-responsibilities/avoiding-underpayment-tax-penalty/).

Questions:

1. Am I understanding the safe harbor correctly in that if we owed $8,200 in federal tax in 2019, so long as we have $8,201 withheld from our paychecks in 2020 we won't be at risk of a federal underpayment penalty?

2. Does Virginia have any similar safe harbors available for state income tax? I wasn't able to find much about it online, particularly regarding personal income tax rather than business income tax. If not, we have some savings I can use to make an estimated payment but I'd rather avoid that if possible.

Thanks so much for your input!

With respect to your first question: you understand it right.

If your income varies significantly from year-to-year, you might be at a risk of overpaying ("giving the government a free loan") or underpaying (getting a surprise bill in April) but if you meet the safe harbor, then there will be no penalties. 

But a couple of fine points:

1) If your AGI ever tops $150k, then you'll need to withhold 110% of the prior year. Sounds like you're not there yet, but just be aware of these special rules as your income increases.

2) By default, your withholding is considered to be allocated evenly to each of the quarters, regardless of when you actually pay it.  This can be an issue if you have a drop in income (and withholding) near the end of the year, since the lower payment is spread to all quarters.  If this is a possibility, an alternative is to track your withholding exactly each quarter, then make Estimated Payments to bring each quarter up to exactly 25%.  At tax time, you use Form 2210 to show your work.

3) If you're planning on cutting it close to the dollar, consider just making Estimated Tax Payments, rather than trying to finesse your withholding to the correct amount. 

As for your second question, I don't know about Virginia.  From the forms (https://www.tax.virginia.gov/sites/default/files/taxforms/individual-income-tax/2019/760c-2019.pdf) it looks like it's similar to the Fed; same due dates and percentages, but without the 110% high-income rule.  I haven't looked at all the nuances; study it for yourself.

[evme]

1) If your AGI ever tops $150k, then you'll need to withhold 110% of the prior year. Sounds like you're not there yet, but just be aware of these special rules as your income increases.

Thanks for the reminder about this, I had forgotten that you need to pay 110% of prior year if AGI tops $150k. You probably saved me an underpayment penalty!

[MDM]

1) If your AGI ever tops $150k, then you'll need to withhold 110% of the prior year. Sounds like you're not there yet, but just be aware of these special rules as your income increases.

Thanks for the reminder about this, I had forgotten that you need to pay 110% of prior year if AGI tops $150k. You probably saved me an underpayment penalty!

It's 110% of prior year if the prior year's AGI is >$150K.  The current year AGI is irrelevant for this safe harbor.