I paid 34k in taxes last year. So far this year, I only paid around 11k in tax withholding through my current job unrelated to stocks and have already made more in half a year than I did for 2018 through stocks. I heard my w2 withholding if I make a huge lump sum will be able to get rid of the penalties for the underpayment for the 1st two quarters. Since I only have a month or so at my current job, my whole paycheck w2 withholding can cover the whole CA state estimated tax but not the federal since federal is much greater. Should I just put the whole amount towards CA state and avoid the 6% interest penalty for the state and pay the 6% for the federal? There is no way I can make 110% of last year's tax liability for federal but I will be able to for state is my reasoning. Any tips?
You can still make estimated payments to both CA or Feds for Q3 or Q4, so you don’t need to get the whole year paid up to avoid penalties. If you’re trying to avoid penalties, I would still withhold as much as you can out of your remaining paychecks. Especially if CA charges a higher penalty interest rate on underpayment / underwithholdings than the Feds do, it would make sense to pay CA with your available withholdings. Then make your estimated Q3 and Q4 payments to the Feds. https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2
Yes, withholdings are treated as being made evenly regardless of when they are actually withheld. This helps even things out in situations like yours. If you take care of CA with your last paycheck or two, you should also aim to hit 110% of last year’s Federal number (assuming 2019 is looking like a good year) with your combined Fed withholdings and estimated payments if you want to avoid the underwithholding penalties. Here are some possibly helpful links. https://www.irs.gov/taxtopics/tc306 https://www.kiplinger.com/article/t...ways-to-avoid-irs-underpayment-penalties.html https://www.thebalance.com/estimated-taxes-and-the-estimated-tax-penalty-3193117 It’s worth noting that the closer you get, the less penalty you pay (just 6% interest on the shortfall for however much time), so paying what you can is still good.
Thanks again! So far I only paid 9k federal and 2k state. If last year I paid 25k federal and 9k state and I have 4 paychecks left at 1900 or so, should I put them all towards state so that way my 1st two quarter (Jan-June) penalties for state (CA) gets wiped out and just only pay the federal tax penalty? Is that how it works?
Just a quick check - did you make more than $150k in AGI for 2018? I’m trying to see if you need to hit 110% for the withholding safe harbor vs just 100% of last year’s tax liability.
Ok, so you only need to hit 100% not 110%. I’m not a tax expert, but this is what I’d do: 1. Put 7k from your paychecks towards CA, bringing your total up to $9k, 100% of last year. Adjust this to be at least whatever the exact number was for your “$9k” CA 2018 tax liability. 2. If you can, put the rest from your paychecks, about $1.5k, towards the Feds, bringing your total up to $10.5k so far, aiming for $25k total, 100% of last year. 3. For Feds, you still are $14.5k short (or whatever the number is, based on how much you withhold in #2 and what the exact “25k” number was). I’d split this remainder in half and make a $7.5k Q3 estimated payment and a $7k Q4 estimated payment, putting a bit more earlier since sometimes that helps reduce any potential underwithholding interest accruals. I can’t be sure this won’t end up with a small Fed penalty, due to some timing differences and such which you want know til you or your CPA actually does you taxes, but you’ll be very close and it won’t be any meaningful amount in any case. Good luck!
Thank you so much! The federal tax penalty is prorated though right? Like if I owe 25k but paid 9k so far, I would only pay 6% interest on 16k and not the full 25k?