Announcement

Collapse
No announcement yet.

Can I skip my last (January) estimated tax payment, if my taxable income went down?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Can I skip my last (January) estimated tax payment, if my taxable income went down?

    Hello - long time reader, first time poster. I am an internal medicine doctor with a primary w2 job and a side 1099 gig covering overnights and another clinic on weekends. This is my first year having anything other than pure w2 income. I estimated my earnings at the beginning of the year and what my tax would be, divided by 4 and have made the first 3 of those payments so far.

    however, because of Covid and some various other issues, I ended up doing fewer 1099 shifts and the pay was cut a bit as well. I also invested more into the solo 401k (employer side from my 1099). When I ran the calculations in light of these, it looks like I will have overpaid already for the 2020 tax year based on normal w2 withholding + my 3 estimated tax payments so far.

    so do I need to still pay the January estimated tax payment? I was told that the estimated payments need to be equal, so if one is missing, even If already overpaying, it has higher risk of audit.

    thank you everyone.

  • #2
    Originally posted by CBCwDiffpls View Post
    I was told that the estimated payments need to be equal, so if one is missing, even If already overpaying, it has higher risk of audit.
    First time in 40 years as a CPA that I've heard that one. Trick or treat, that is incorrect!

    If you overpay your taxes then, no, there is no reason to pay in your 4th estimate in order to overpay even more. Estimates are calculated to meet IRS "safe harbor" rules in the event of underpayment. So, in general on this forum, physician families aim to pay in 110% of their prior year income taxes in a year of increasing tax burdens. That is to avoid penalty and interest on having a balance due in April.

    This year, however, was an anomaly for many physician families (aka, 2020: The Year of the Never-Ending Tax Season). Many clients will have lower tax bills and have been doing significant planning in order to avoid large overpayment in April as a result of simply complying with safe harbor rules. You are looking at this correctly. Had you skipped your first estimate rather than your last, you might have ended up in a penalty situation but you should be fine.

    I hope 2021 is better for you - welcome to the forum!
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3
      Originally posted by jfoxcpacfp View Post

      First time in 40 years as a CPA that I've heard that one. Trick or treat, that is incorrect!

      If you overpay your taxes then, no, there is no reason to pay in your 4th estimate in order to overpay even more. Estimates are calculated to meet IRS "safe harbor" rules in the event of underpayment. So, in general on this forum, physician families aim to pay in 110% of their prior year income taxes in a year of increasing tax burdens. That is to avoid penalty and interest on having a balance due in April.

      This year, however, was an anomaly for many physician families (aka, 2020: The Year of the Never-Ending Tax Season). Many clients will have lower tax bills and have been doing significant planning in order to avoid large overpayment in April as a result of simply complying with safe harbor rules. You are looking at this correctly. Had you skipped your first estimate rather than your last, you might have ended up in a penalty situation but you should be fine.

      I hope 2021 is better for you - welcome to the forum!
      That is reassuring, thank you! I think I was concerned because I remember reading something about having to file a separate form if your quarterly income changes significantly, so your estimated payments would be different accordingly. I never did this and just estimated a high amount to be safe.

      Either way, I think this shows I should just pay someone to guide me through this at least for this year, and maybe I will be more comfortable doing it myself (as I had been for all my W2-only years) in the future.

      Thanks again. Happy Halloween!

      Comment


      • #4
        Pretty simple. Form 2210.
        https://www.irs.gov/forms-pubs/about-form-2210

        Comment


        • #5
          • Withholding by default is treated as equally received during the year. Estimated tax payments are treated for that specific quarter.
          • It is an under payment penalty. This only applies if you have not made necessary timely quarterly payments of withholding + estimated tax payments.
          • Four equal estimated tax payments are a safe harbor from having to file Form 2210. Not an absolute requirement.
          • Three equal payments and a smaller/no fourth quarter payment is not an uncommon occurrence.
          • I have done this on several occasions and not heard a peep from the IRS.
          • The most this would cause is a CP2000 notice and not trigger a full blown audit. You could probably solve this with a simple phone call. The IRS is not staffed by a bunch of Ogres.
          • If you are really worried about it you could file a Form 2210 as suggested [email protected]

          Comment


          • #6
            Thank you everyone!

            Comment

            Working...
            X