estimated taxes 2020

[LSTAX]

If you have a long term capital gain from selling stock in 2020 that will cause you to owe a large amount of tax in April, can you avoid penalty and interest for both IRS and CA as long as you have paid at least  100% (or 110%) of your 2019 total tax no matter how large the gain is?

Is there any reason to pay the extra tax in 2020 rather than waiting until 2021?

[sjrcpa]

There is no interest unless you pay after April 15, 2021.

Yes regarding the penalty for federal. I think it matters how large for CA. I'll defer to my colleagues that practice in CA.

[abctax55 · Accepted solution]

Fed = yes/no

CA =  maybe/maybe

Fed:  As long as the 100/110% has been paid thru-out the year as required via timely estimates and/or withholding.  You can't just make an estimated payment now/Jan 15, 2021 and have the penalties eliminated.

CA:  Depends on the total income. California has this different rule IF the income for the year is over a million (that amount may have increased...check Form 5805); the 100/110% rule can't be used.   And if the income is less than that, you still have to have paid in the 2020 amounts timely (estimates or withholding) just like the Federal

And paying the CA hit before the end of the year involves evaluating your client's specific situation after considering SALT limitations.  And you should be aware of talk that SALT limits *MIGHT* be suspended for 2021.

Lot of moving parts to your OP.

[LSTAX]

Thank you!

[LSTAX]

Thank you.  For IRS, you are correct that 100 - 110% of the 2019 tax has to be spread out evenly to avoid penalty.   Say that the 2019 total fed tax was $10,000 and they paid $2,500 each quarter but ended up owing another $80,000 would they be penalty and interest free?  What if they paid the $10,000 on 1/15/2021 for quarter 4?  Would they be penalized just on the $10,000 that should have been spread out or does the penalty factor in the $80,000?

[abctax55]

The "extra" tax hit of $ 80,000 doesn't have to be paid until 4.15.2021

[LSTAX]

but if you pay the $80,000 on 4/15/2021 but did not spread out the $10,00 prior year tax properly does the penalty calculation only apply to the $10,000 that wasn't spread out evenly.  Thanks for clarifying.

[BobKamman]

@abctax55 "You can't just make an estimated payment now/Jan 15, 2021 and have the penalties eliminated"

I had two separate clients call me this week about selling rental properties in November or December with a large capital gain.  If the extra income is received in the fourth quarter, the final payment can be more than the first three.

For one of these clients it was better to make the state payment (not CA) before the end of the year, because they will still be below the SALT limit of $10K.  

[sjrcpa]

Yes/maybe. Depends on when the large capital gain happened. There are exceptions to the penalty involving extra calculations that could reduce it.

[LSTAX]

It really is a moving target as you noted and sjrcpa noted (sounds like annualized method could be used). 

May be best to aim to keep the amount due less than $1,000!

[BobKamman]

@LSTAX "May be best to aim to keep the amount due less than $1,000!"

I'd rather aim for keeping the penalty less than $100, because then IRS doesn't bother with assessing it.  Used to be, the safe amount was a $1,400 underpayment.  With the lower penalty rates these days, it's probably closer to $1,800.   A taxpayer who makes four $250 payments -- or even four $300 payments -- has a fool for a practitioner.