For 2024, my income shot up quite a bit compared to 2023. My spouse and I are both employees with regular tax withholding, but most of the extra income this year is from stock trades.
To cover the higher tax bill, we’ve set up our withholding to be over 110% of what we owed last year, adding extra amounts to our W-4s. I thought this would put us in the safe harbor to avoid any underpayment penalties.
We also applied our 2023 refund to the first quarter estimated tax for 2024. Now, I’m worried that since I didn’t make estimated tax payments for Q2 and Q3, we might still get hit with an underpayment penalty even though our total withholding should cover the 110% safe harbor rule.
Is this correct? Could we end up with a penalty because I used the 2023 refund for Q1 and skipped Q2 and Q3 payments?
NOTE: We adjusted our W-4 around April (or May), not from the start of the year. But from what I understand, withholding is considered evenly paid across the year regardless of when it’s actually withheld. So if we have more than 110% withholding compared to last year, there shouldn’t be any penalty.
No, because of the way the penalty is calculated. When you look at Form 2210, it first checks your current year tax and then subtracts the withholding. It compares it to last year’s safe harbor.
If your withholding is over the safe harbor amount, you’re set. No penalty. If it’s below, that’s when it checks your payments. Since you applied the refund to Q1, you should be in the clear.
In short, no. You don’t need to make Q2 and Q3 payments if your withholding covers it.
>Our total tax withholding for 2024 is over 110% of the total tax owed last year (we increased withholding by adding additional amounts on our W-4s). I assumed this would allow us to rely on the safe harbor rule to avoid an underpayment penalty for 2024.
That’s correct.
>However, I also applied my 2023 tax refund to my estimated tax for the first quarter of 2024. Now, I’m concerned that by treating my 2023 refund as an estimated tax payment for Q1 of 2024 and then not making any estimated tax payments for Q2 and Q3, we might incur an underpayment penalty
No, paying extra won’t create a penalty if it’s over the minimum required payment.
I believe you’re fine as long as you hit the Safe Harbor withholding amount; they won’t penalize you for the stock gains. I’m saying this because I’m in a similar situation.
In previous years, I’ve had to send payments to cover extra taxes from stock trades. Sometimes I only sent a Q4 payment, and I’ve never gotten an underpayment penalty.
Yes. In one case, the trades were all in Q4. I’d have to check to be sure on the others, but I think I paid estimated tax only twice and sent larger checks a few times directly to the IRS.
I’ve done it in different ways:
Sent a Q4 payment based on Q4 trades
Sent a Q4 payment based on trades from earlier quarters too
Sometimes skipped the Q4 payment and just paid in April
@Fallon
Technically, if your withholding didn’t meet safe harbor and you had uneven quarterly payments, you’d need to file Form 2210 (with Schedule AI if needed) to match income and payments to the right quarters for calculating any penalty.
@Chen
In my case, my W-2 met safe harbor withholding for all years involved.
The tricky part was in 2006-2007 when I had a big tax event. My 2006 tax bill was higher than my 2007 salary, so it was hard to meet the 110% of total tax requirement. But it worked out.
Just making sure I understand—so is this your situation?
You have $X withheld from your W2 for 2024, and you applied your 2023 refund of $Y to 2024 taxes.
If $X + $Y is more than 110% of your 2023 tax liability, you won’t have a penalty. The balance is checked by comparing year-to-date payments each quarter to the safe harbor requirement. Since withholding counts as being evenly paid across quarters, and the refund credit is in Q1, you should be fine. You can review Form 2210 to see how it all breaks down.
Briar said: @Chen
Yes, that’s right, but one thing to add: we adjusted our withholding around April, not from the start of the year.
Withholding is treated as evenly paid throughout the year unless you specifically choose to apply it by quarter on Form 2210. So adjusting in April won’t matter for your total withholding.
Kip said:
If you meet the safe harbor, you won’t get an estimated tax penalty no matter what estimates you skipped or didn’t make.
That’s not quite true. If you only make a Q4 safe harbor payment, you’d still have a penalty for the first three quarters if you didn’t make any other payments and if the income was earned throughout the year.
In this case, though, since the original poster’s 2024 withholding is over 110% of their 2023 taxes, they’re in the clear. The original poster might be confusing estimated tax payments with withholding, which is counted as if it’s spread evenly over the year. Also, applying a 2023 overpayment to 2024 is allowed and could reduce any potential penalty.