Safe Harbor (Estimated Payments)
Authority: IRC §6654(d)(1)
The estimated tax safe harbor is the rule that guarantees no underpayment penalty regardless of what the current year's tax turns out to be. A taxpayer is protected if timely quarterly payments plus withholding equal at least 100% of the prior year's total tax, or 110% of the prior year's tax if prior-year adjusted gross income exceeded $150,000 ($75,000 married filing separately). The alternative standard is paying at least 90% of the current year's actual tax as the year goes. The prior-year safe harbor is the planning workhorse because it is a known, fixed number in January: a business having a breakout year can pay the safe harbor amount, invest the difference, and settle the balance in April penalty-free. In a down year, the 90% current-year standard is usually cheaper than overpaying based on last year.
Example
Last year's total tax was $80,000 and AGI was over $150,000, so the safe harbor is $88,000, or $22,000 per quarter. Even though this year's tax lands at $150,000, paying $22,000 each quarter means the extra $62,000 is simply due April 15 with no penalty.
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