Required to pay estimated taxes based on unexpected / unforeseen income?

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This topic contains 7 replies, has 5 voices, and was last updated by  dienerte 1 month, 4 weeks ago.

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  • #3223

    rc77z
    Participant

    In situations where owing taxes in excess of $1,000 can’t be anticipated (e.g., income derived from mandatory stock sales), is one simply expected to make estimated payments ‘just in case’ or are penalties waived when income has been received in that way?

    I’m not aware of any formula that will tell me that ‘x’ amount of unexpected income will leave me owing more than $1000 tax on December 31st, and that I therefore need to pay estimated taxes during the quarter I received that income as a precaution.

    Replies appreciated.

    #3224

    kaneohe
    Participant

    If you pay estimated taxes tied to your income (unexpected or not) you should be close . If you can withhold, even better since timing of the withholding is not as critical as w/ estimated taxes. See Sch AI Form 2210. https://www.irs.gov/pub/irs-pdf/f2210.pdf

    #3225

    snargle
    Participant

    rc77z, your question isn’t totally clear. You haven’t really told us whether you’re asking about $1,000 being the total tax for the year, or about the $1,000 being the balance of tax after applying withholding to cover some, most, all, or maybe just quite not enough, of the year’s tax without the additional (unanticipated and unwithheld) income and the resultant additional tax…

    #3226

    kaneohe
    Participant

    “I’m not aware of any formula that will tell me that ‘x’ amount of unexpected income will leave me owing more than $1000 tax on December 31st, and that I therefore need to pay estimated taxes during the quarter I received that income as a precaution.”

    You can estimate your taxes w/ tax software or a tax calculator. Unexpected income should be input there and the new result will tell you if you will have a shortage or not. Hopefully the unexpected income comes early enough that you have time for the estimated tax payment.

    #3227

    rc77z
    Participant

    Thanks for those replies.

    The person in question is retired so she had no withholdings. Because of the unexpected income from a mandatory stock sale she ended up owing approximately $1,050 in tax at the end of the year. Normally she wouldn’t have owed anywhere near that amount.

    As far as I know, social security and relatively small amounts of interest and dividend income are the only predictable income she has.

    The estimated tax payment would have been due on January 15 of this year. She didn’t receive the tax document showing her income from the stock sale until the end of January.

    Therefore I couldn’t see how she would have anticipated owing $50 more than the amount at which she could have ignored paying estimated tax.

    #3232

    kaneohe
    Participant

    Now that the lesson that such things can happen, it may be useful to anticipate a repeat. One could keep tabs on upcoming mergers/spinoffs on
    stocks owned and inquire about the consequences.

    I too was blindsided by a similar exchange in 2017. I was used to such
    exchanges being mostly tax free so had no idea. Hopefully lesson learned and I will be more alert in the future.

    It is likely that your penalty will be minimal. Since there would have been no penalty at $1000, I believe the penalty, if any, will be based on
    the excess $50 and interest at 5% or so for the period it was late (3 mos or so). Should not be very much and likely not worth IRS time to pursue.

    #3239

    motax
    Participant

    One way to take care of it is to have withholding equal to previous year’s tax liability. That way, even if you have unexpected income and owe tax, there will not be any estimated tax penalty.

    #3240

    dienerte
    Participant

    rc77z – The Motax response hits it on the head for sure. On the other hand, I have never been told by any taxpayer that I deal with that they received a penalty for under withholding (and I have seen numerous taxpayers owing more than $1,000 over the years). I think the IRS might have “bigger fish” to go after!

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