- Late Start Earner
2020 Tax Filing and the Safe Harboring Rule for Estimated Tax Payments
I feel so relieved! Today I finalized and filed my taxes online using Intuit's Turbo Tax. Due to the pandemic, I work remotely from a state that has a lower income tax relative to the state that my corporate office is located in. Therefore, I regularly pay higher tax rates throughout the year and received a refund.
2020 Tax Return Summary
Federal Taxes Paid: $46,4##
Itemized Deductions: $17,7##
Federal Refund: $3##
Resident State Taxes Paid: $3,7##
Resident State Refund: <$100
MegaCorp State Taxes Paid: $8,3##
MegaCorp State Refund: $2,4##
Estimated Tax Payments
If applicable, TurboTax will also calculate the quarterly estimated tax payments that one should pay to the federal and/or state governments to avoid a penalty the following year when filing taxes.
In my particular situation, I have substantial untaxed earned income through my Restricted Stock Units (RSUs) quarterly vests. MegaCorp already deducts taxes from my RSUs each quarter, however, my highest income tax bracket rate is lower than the standard federal income tax rate removed by my employer to pay for taxes. This tax rate difference composes the tax gap owed to the federal government.
According to Turbo Tax, here is the schedule of estimated tax payments I should be pay throughout 2021:
My Resident State estimated quarterly tax payments are at a rate low enough for me to budget and cash flow each quarter, which is what I plan to do.
Federal Safe Harbor Rule for Estimated Taxes
However, I do not plan to pay my Federal estimated quarterly tax payments since I am projected to meet the Safe-Harbor Rule for estimated taxes (also, see IRS Publication 505). Typically, if you pay 100% of your previous year's taxes to the federal government, you will avoid an underpayment penalty. In my case, since I earn more than $150K/year, I am required to pay 110% rather than 100% of my previous year's taxes to satisfy the "safe-harbor" requirement and avoid penalty.
Last year, I paid about $46,500 in taxes to the federal government. To meet the Safe Harbor Rule and avoid an underpayment penalty, I need to pay at least $51,150.00 to the federal government through a combination of paycheck withholdings and quarterly estimated tax payments. According to my most recent paycheck one quarter into the year, I am already 40% of the way to satisfying the Safe Harbor Rule. In fact, some rough numbers suggest that by year-end, I am likely to surpass the Safe Harbor Amount by an excess of nearly $20K.
How can I possibly meet the Safe Harbor Amount so quickly this year? The main reason is that last year, my overall income was lower than this year. Because of my lower income, I paid less in federal taxes. This year, my federal withholding is based on my higher income, and therefore a larger portion is getting withheld from the start.
Now, just because I will avoid a federal underpayment penalty, does not mean that I can evade paying taxes! Based on Turbo Tax's calculations, I should expect a tax bill next April to the tune of about $10K. But that's a problem to deal with when planning next year's budget :-).