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I haven't done my tax returns for at least 40 years. For most of my working life, I've paid estimated taxes, which were figured by my tax person, using the "safe harbor" provisions. I'm retired now, with SS and my wife has some part-time W-2 income, plus we have interest, dividends, and cap gains, which are greater than the combined SS and W-2 income. Our dividends and cap gains come as distributions from taxable Vanguard index funds. Anyway, I just found out today that the "safe harbor" provision only applies to folks with an AGI over $150K. We've always had much in excess of this amount, but now that I'm not working, we are getting very close to the $150K AGI level, possibly a little below or little above. Anyway, why does the IRS care about AGI when in comes to "safe harbor" estimated payments, or am I wrong about all of this. I would like to avoid having to do quarterly calculations.
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Federal safe harbors apply for all income levels. The safe harbors are different depending on income.

IRS Publication 17:
Estimated tax safe harbor for higher income taxpayers. If your 2011 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must deposit the smaller of 90% of your expected tax for 2012 or 110% of the tax shown on your 2011 return to avoid an estimated tax penalty.
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I just found out today that the "safe harbor" provision only applies to folks with an AGI over $150K.

That makes two of us.

I assume the safe harbor you're referring to is basing this year's estimated tax payments on last year's tax.

If last year's AGI was under $150,000 four equal timely ES payments for this year satisfy the safe harbor, and no ES penalty will be charged regardless of how much you end up owing April 15.

If last year's AGI was $150,000 or more, this year's ES payments must equal 110% of last year's tax to meet the safe harbor. Details about all your options for avoiding the penalty are in Pub 505.

Your state may have different requirements.

Phil
Rule Your Retirement Home Fool
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Thanks for the responses. I guess I need to read more. So, if your AGI is under $150K, then all you have to do is make 4 equal payments that total the amount of your tax for the prior year? That seems easy enough, assuming I understood correctly.
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So, if your AGI is under $150K, then all you have to do is make 4 equal payments that total the amount of your tax for the prior year? That seems easy enough, assuming I understood correctly.

Just one tense change. If your AGI was under $150K....

So, for 2012, if your 2011 AGI was under $150K, your 2012 safe harbor is 2011 tax paid in four equal, timely 2012 ES payments.

Note that there are other safe harbors, but I won't muddy the waters by mentioning them. That's why we have Pub 505.

Phil
Rule Your Retirement Home Fool
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Thanks, Phil.
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So, for 2012, if your 2011 AGI was under $150K, your 2012 safe harbor is 2011 tax paid in four equal, timely 2012 ES payments.

One final question: If you use the amount of taxes paid during the prior year to pay 4 equal installments for estimated taxes, do you subtract the amount withheld from your spouses W-2 for the prior year in determining the amount subject to estimated taxes. If you do this using the amount from your spouse's W-2, are you then safe from any penalty in the current tax year? Thanks.
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If you use the amount of taxes paid during the prior year to pay 4 equal installments for estimated taxes, do you subtract the amount withheld from your spouses W-2 for the prior year in determining the amount subject to estimated taxes.

No. Total Tax. (Line 61 of the 2011 1040)

You may subtract from that figure any 2012 withholding in determining your 2012 ES requirements. Unless you elect otherwise, withholding is credited equally across the four ES payment periods in determining whether you met the safe harbor.

Phil
Rule Your Retirement Home Fool
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You may subtract from that figure any 2012 withholding in determining your 2012 ES requirements. Unless you elect otherwise, withholding is credited equally across the four ES payment periods in determining whether you met the safe harbor.

But how do you know the exact amount of 2012 withholding when you estimate your 2012 estimated payments in April 2012? Can you use the amount of 2011 withholdings, then would you be in a safe harbor so to speak? Obviously, I'm more concerned about 2013, since 2012 is almost over. For 2013, if I take the tax paid in 2012, then subtract the amount of that tax that was paid by withholdings (as opposed to estimated taxes), then divide by 4, would I be safe in 2013 if I paid estimated taxes in that amount? I hope I'm being clear enough, but since I know just enough to get in trouble, I'm frequently unable to articulate my exact question properly. Thanks.
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ResNullius asks: "But how do you know the exact amount of 2012 withholding when you estimate your 2012 estimated payments in April 2012?"

You should be able to look at one of your DW's paystubs from the beginning of the year (i.e., from Jan 2013) and estimate her total annual withholdings for 2013. Assuming that all her paychecks are generally equal, just take the amount from that check times the total number of paychecks per year). If her paychecks are of varied amounts, you could use the total withholdings amount from last year and adjust up/down based on her projected income for this year.

Another option to consider (espeically if you don't want to stress over remembering the quarterly payments)......you may be able to simply avoid the quarterly estimated payments by adjusting DW's withholdings. She can submit a revised W-4 and request that a specific additional amount be withheld from each check. Of course, this only works as long as the amount of withholding does exceed her entire paycheck ;-).

Making Trax
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You may subtract from [2011 total tax] any 2012 withholding in determining your 2012 ES requirements. Unless you elect otherwise, withholding is credited equally across the four ES payment periods in determining whether you met the safe harbor.

But how do you know the exact amount of 2012 withholding when you estimate your 2012 estimated payments in April 2012?


You don't.

Can you use the amount of 2011 withholdings, then would you be in a safe harbor so to speak?

The answer remains no.

Obviously, I'm more concerned about 2013, since 2012 is almost over. For 2013, if I take the tax paid in 2012, then subtract the amount of that tax that was paid by withholdings (as opposed to estimated taxes), then divide by 4, would I be safe in 2013 if I paid estimated taxes in that amount?

Still no. It'll still be no the next time you ask.

I hope I'm being clear enough, but since I know just enough to get in trouble, I'm frequently unable to articulate my exact question properly.

You're being perfectly clear, and I'm not saying that what you suggest wouldn't make sense. It's just that it's contrary to the law.

I don't recall whether either you or your spouse is still working. If so you should have a decent estimate of 2013 anticipated wage withholding by April 1. Likewise if you're having tax withheld from pension or SS payments. Make a conservative estimate of total withholding for the year, subtract that from 2012 total tax, and pay 1/4 of that by April 15. Remember that you can lower later ES payments; you just can't retroactively increase earlier ones. Except....

If you'll be taking an IRA or 401(k) distribution and can defer that until December you can manipulate the withholding from the IRA (and the 401(k) except that a minimum of 20% is required) to get you where you need to be for the year.

Phil
Rule Your Retirement Home Fool
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My thanks to all.
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