Under withholding question
I think I might be under withheld for 2022 federal income taxes due to a late capital gain distribution. My question is: I have heard that if you withheld more in 2022 than was withheld in 2021 or taxes paid in 2021 there is no penalty, which is my situation. Am I correct? If I am not correct, is it possible to send in what I believe is enough to eliminate a penalty for 2022? Thanks for any help with this.
Rusty Nelson
Permalink Submitted by Alan - IRA critic on Sun, 2023-01-08 22:52
If your AGI for 2021 is under 150k MFJ or 75k single, there is no penalty if your 2022 withholding equals either 100% of your 2021 tax liability or 90% of your 2022 tax liability. There are called safe harbors. But if you are paying using quarterly estimates, the estimates must be paid by the respective due dates. Since you can no longer withhold for 2022 and if you are short of a safe harbor, you can pay an estimate by 1/17/2023, but that does not guarantee that you would not incur a penalty for underpayment for the first 3 quarters. Withholding is preferable since it is treated as paid equally throughout the year regardless of when you actually pay it.
Permalink Submitted by Rusty Nelson on Sun, 2023-01-08 23:26
Thanks for the detailed response Permalink. My estimate of my AGI is about $164K for 2022, so I am a little above the $150K for the safe harbor provision. I do make quarterly paymemts, but I I guess I will have a penalty to pay.Rusty Nelson
Permalink Submitted by Alan - IRA critic on Mon, 2023-01-09 01:40
The safe harbor AGI is for the prior year (2021). If your AGI was also over 150k in 2021, the safe harbor is then 110% of your 2021 tax liability instead of 100%. And even if you miss the safe harbor, you may not miss it by much and any penalty is based on the amount you fell short.
Permalink Submitted by David Mertz on Mon, 2023-01-09 11:48
If the underpayment was largely due to an unexpectedly large capital gains distribution in Q4 such that you do not have underpayment for Q1 through Q3, an sufficient estimated tax payment made by January 17, 2023 will avoid an underpayment penalty, but to avoid the penalty you will probably have to annualize income on Schedule AI of Form 2210 to avoid the capital gains distribution from being treated as received uniformly throughout the year.