Estimated tax payments - Spidell

Estimated tax payments

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Message Board Estimated tax payments

This topic contains 7 replies, has 4 voices, and was last updated by Christopher Green 3 months, 4 weeks ago.

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  • #172232
    Anonymous

    What is the rule for making federal and state estimated tax payments when a client has a windfall tax year?

  • #172317
    Larry Pon
    Participant

    The safe harbor for estimated payments is the lesser of 90% of current year tax liability or 100% of prior year tax liability.  However, if AGI is over $150,000 or higher, then it is a based upon 110% of prior year tax liability.

    For CA estimated taxes, 90% needs to be paid in by January 15th if AGI is over $1 million.   This means for CA purposes, you cannot use 110% of prior year if AGI is over $1 million.

     

     

  • #172334
    Anonymous

    So what if you have a large random gain in the current year? Then you pay 110% of last year if you have high income OR 90% of PY or 100% of current year? You still will end up owing interest though right??

  • #172342
    Larry Pon
    Participant

    If you pay at least 110% of last year’s tax liability, there will be no penalty for underpayment of estimated tax.     How much of a gain is there?   If the projected AGI is over $ 1 million, let’s make sure at least 90% of projected tax is by by January 15th.   To play it safe, I tell my clients to pay at least 100% to give us a margin of error.

  • #172371
    Lynn Freer
    Participant

    For federal there is no interest or underpayment penalty if paying 110%. For CA, you must pay 90% of the current liability and there will be an underpayment penalty if the payment isn’t made in the quarter the gain happens or unless it’s done through withholding. See the Form 5805. Also, Larry is correct, if AGI is over $1 million, 90% must be paid in estimates and/or withholding

  • #172386
    Anonymous

    do you mean 90% of prior years need to be paid?

    So im confused…in order NOT to get interest or underpayment, you need to pay in 110% of prior years right?

     

    For federal there is no interest or underpayment penalty if paying 110%. For CA, you must pay 90% of the current liability and there will be an underpayment penalty if the payment isn’t made in the quarter the gain happens or unless it’s done through withholding. See the Form 5805. Also, Larry is correct, if AGI is over $1 million, 90% must be paid in estimates and/or withholding

  • #172418
    Lynn Freer
    Participant

    No For CA you must pay 90% of current year if current year AGI is over $1 million but you can’t pay it all in January. It must be paid equally or using timely using the annualized method. There is one exception: if prior year tax was paid with withholding and not estimates you may fit that exception.

    See R&TC Sec. 19136, 19136.1, 19136.3

  • #172585
    Christopher Green
    Participant

    The best way to determine CA estimated taxes correctly is to follow the “California Estimated Tax Worksheet” in the “Instructions for Form 540-ES.” It is relatively easy to follow these 22 steps. When done, it will tell you exactly when and how much estimated taxes that you must pay to avoid penalties for income under $1,000,000. The trickiest part is when the CA AGI is expected to be over $1,000,000 for the current year. Since income at this level is often not made equally throughout the year and the final amount is difficult to predict, it is often best to use the annualized method. Because it is common to have large fluctuations at this level, this often results in overpayments to CA but it avoids penalties.