Chapter 27
Estimated Tax Payments

Income taxes are collected on a pay-as-you-go basis through withholding on wages and pensions, as well as quarterly estimated tax payments on other income. Where all or most of your income is from wages, pensions, and annuities, you will generally not have to pay estimated tax, because your estimated tax liability has been satisfied by withholding. But do not assume you are not required to pay simply because taxes have been withheld from your wages. Always check your estimated tax liability. Withholding may not cover your tax; the withholding tax rate may be below your actual tax rate when considering other income such as interest, dividends, business income, and capital gains.

Your withholdings and estimated tax payments must also cover any liability for self-employment tax, alternative minimum tax (AMT), the additional 0.9% Medicare tax on earnings, the 3.8% tax on net investment income, and FICA withholding tax for household employees.

If you expect your 2018 tax liability to be $1,000 or more after taking into account withheld taxes and refundable credits, you should make quarterly estimated tax payments unless you expect the withholdings and credits to be at least 90% of your 2018 total tax, or, if less, 100% or 110% of your total tax for 2017. The 100% test applies if your 2017 adjusted gross income (AGI) was $150,000 or less, $75,000 or less if for 2018 you will file as married filing separately. The 110% test applies if your 2017 AGI exceeded the $150,000 or $75,000 threshold.

Failure to pay a required estimated tax installment will subject you to a penalty based on the prevailing IRS interest rate applied to tax deficiencies, unless the IRS waives the penalty.

27.1 Do You Owe an Estimated Tax Penalty for 2017?

When you have computed the exact amount of your tax liability on your 2017 return, you can determine whether you are subject to an estimated tax penalty. If you owe less than $1,000 on your 2017 return after taking into account withheld taxes and refundable credits, you are not subject to a penalty. If the tax owed after withholdings is $1,000 or more, you will not owe a penalty if your 2017 withholdings plus refundable credits and estimated tax installments were at least 90% (66 ²/₃ % for farmers and fishermen) of your 2017 total tax.

Total tax here means not only your 2017 regular income tax and alternative minimum tax (AMT) liability after credits, but also other taxes such as self-employment tax, the additional 0.9% Medicare tax on earnings (28.2), the 3.8% tax on net investment income (28.3), household employment taxes, penalty taxes (such as penalties on early retirement plan distributions, on distributions from qualified tuition programs not used for education), and taxes from recaptured credits. The individual shared responsibility payment for not having minimum essential coverage (38.5) is not included in the “total tax” for estimated tax purposes. However, the total tax does include any excess advanced premium tax credit that you received in 2017 and have to repay with your 2017 return when you reconcile your advanced credit with the credit you are actually entitled to (25.12).

Even if the 90% test was not met, you may be able to avoid a penalty if your 2017 withholdings, refundable credits and estimated tax installments were at least 100% of the total tax (see above) shown on your 2016 return. This exception requires that the 2016 return covered all 12 months. However, if your 2016 adjusted gross income exceeded $150,000 ($75,000 if you are married filing separately for 2017), your withholdings plus estimated tax installments for 2017 had to be at least 110% of your 2016 total tax (not 100%) to qualify for this prior-year liability exception. The 110% rule does not apply to farmers and fishermen.

Note that to completely avoid a penalty for 2017 under either the 90% current year exception or the 100%/110% prior-year exception, you must have paid at least 25% of the amount required under the applicable exception by each of the four payment dates in 2017. The penalty is figured separately for each payment period; see below.

You are not subject to an estimated tax penalty for 2017 if you did not have to file a 2016 return or your 2016 total tax was zero. This is so even if you owe $1,000 or more (after withholdings) on your 2017 return and you do not qualify for either the 90% current-year exception, or the 100%/110% prior-year exception, This exception applies only if you were a U.S. citizen or resident for all of 2016 and your 2016 tax year included 12 full months.

If you underestimated your 2017 liability because of an unexpected increase in income during 2017, or if you did not earn income evenly throughout 2017, such as where you operated a seasonal business, you may be able to lower or eliminate the penalty by using the annualized income installment method. Under this exception, your required installment for one or more payment periods could be reduced below 25% of the required annual payment by figuring the installment that would be due if the income (and deductions) earned before the date for the installment were annualized. The computation is quite complicated; see the Form 2210 instructions and the worksheets in IRS Publication 505 for the details of applying the annualized income exception.

Penalties are figured separately for each payment period. Separate penalty determinations must be made for each of the four 2017 estimated tax payment periods, as of the applicable installment dates: April 18, June 15, and September 15 in 2017, and January 16, 2018. This means that if, after taking into account withholdings from your pay, you underpaid an installment, you may owe a penalty for that period even though you overpaid later installments to make up the difference. However, withholdings towards the end of the year can eliminate an underpayment for an earlier period. In applying withholdings, the total withholdings of the year are divided equally between each installment period unless you elect on Form 2210 to apply them to the periods in which they were actually withheld. An overpayment for a period carries over to the next period.

The penalty for each period, which is based on the prevailing IRS interest rate for deficiencies (46.7), runs from the installment due date until the amount is paid or until the regular filing date for the final tax return, whichever is earlier.

Figure the 2017 penalty for yourself on Form 2210 or let the IRS do it. In most cases you do not have to file Form 2210 to figure an estimated tax penalty; the IRS prefers to figure it and send you a bill if a penalty is due.

However, you must figure your penalty and file Form 2210 if (1) you request a partial waiver of your penalty (see below for waiver rules), (2) you use the annualized income method (Schedule AI of Form 2210) to reduce or eliminate your penalty, or (3) you elect to treat your withholdings as paid on the dates withheld rather than in equal amounts on the four installment dates.

In the following situations, the IRS requires you to file only page 1 of Form 2210 but not the rest of the form (Parts III and IV) on which the penalty computation is made: (1) you request a waiver for your entire penalty, or (2) you filed a joint return for either 2016 or 2017 (not both) and your required annual payment for 2017 was based on the 100% or 110% prior-year safe harbor (because it was less than the amount required by the 90% current-year test). If you are requesting a waiver, attach a statement to page 1 of Form 2210 that explains the grounds for the request (see the waiver rules below). For situations (1) or (2), you must file only page 1 (Parts I and II) of Form 2210 and are not required to figure your penalty, but you may use Part III or Part IV of Form 2210 as a worksheet to figure the penalty and enter it on your return.

If you use Part IV to figure the penalty under the regular method, an underpayment for any payment period reduces the payments made in the following period. That is, an underpayment of one period is carried over to succeeding periods on Form 2210. If you underpay for a period, any payment you make after that installment date will be applied first to the earlier underpayment. Thus, even if you make the required payment for a period, you could still be subject to a penalty for that period because your payment is applied to a prior underpayment.

If you overpaid for any period, the excess carries over to the next period. The excess cannot be used to make up for an underpayment of the prior period if the earlier payments were made online, by phone, or with Form 1040-ES vouchers. However, withholdings are allocated equally over the year so that withholdings late in the year can reduce an underpayment for an earlier payment period.

Waiver of penalty for hardship, retirement, or disability. The IRS may waive the penalty if you can show you failed to pay the estimated tax because of casualty, disaster, or other unusual circumstances.

The IRS may also waive a penalty for a 2017 underpayment if in 2016 or 2017 you retired after reaching age 62 or became disabled, and you failed to make a payment due to reasonable cause and not due to willful neglect.

To apply for the waiver, attach an explanation to Form 2210 that documents the circumstances supporting your waiver request. For a waiver due to retirement or disability, show your retirement date and age or disability date. If an underpayment was due to a federally declared disaster, you do not have to request a waiver on Form 2210 because the IRS allows an automatic postponement following such a disaster. When you file your return, the IRS should identify your residence as being in a federally declared disaster area and if you still owe a penalty following the end of the disaster waiver period, the IRS will send you a bill. If you are requesting a waiver due to a disaster other than a federally declared disaster, other casualty, or unusual circumstance, attach documentation of the event, including police and insurance company reports, and an explanation as to how it prevented you from making estimated tax payments.

Farmers and fishermen. Farmers or fishermen who earned at least ⅔ of their 2016 or 2017 gross income from farming or fishing can use Form 2210-F to determine whether they owe an estimated penalty for 2017, but generally the form does not have to be filed because the IRS will figure any penalty; see the Form 2210-F instructions.

27.2 Planning Estimated Tax Payments for 2018

In planning your payments for 2018, you may not want to pay any more than is necessary to avoid a penalty. You can avoid a penalty for 2018 by planning payments in 2018 that meet the 90% current-year test or the 100%/110% prior-year safe harbor.

90% current-year test. If you expect your income, deductions, and tax credits for 2018 to be about the same as they were for 2017, and you will not have any additional liabilities for 2018 that you did not have for 2017, you can base your 2018 withholdings and quarterly estimated tax installments on 90% of your projected 2018 total tax. In projecting your tax liability for 2018, take into account possible liability for the alternative minimum tax (AMT), self-employment tax, the 0.9% additional Medicare tax on earnings, the 3.8% tax on net investment income, household employee taxes, penalty taxes, and recapture taxes, including a repayment of advance payments of the premium tax credit.

If you expect your 2018 total tax to be lower than your 2017 total tax, such as where your income has dropped, you can base your 2018 withholdings and estimated tax installments on 90% of the estimated 2018 total tax.

You can use the 2018 Estimated Tax Worksheet in the instructions to Form 1040-ES for 2018 to figure the required annual payment under the 90% test, as well as under the prior-year safe harbor test discussed next.

Safe harbor for 2018 based on 2017 tax. If you cannot make a precise projection of your 2018 income and deductions, you can play it safe and avoid a possible penalty for 2018 by planning withholdings and quarterly estimated tax installments in 2018 that equal your 2017 total tax if your 2017 adjusted gross income is $150,000 or less ($75,000 or less if married filing separately for 2018), provided you filed a 2017 return covering a full 12 months. If your 2017 AGI exceeds the $150,000 (or $75,000) threshold, your payments for 2018 must be at least 110% of your 2017 tax under the prior-year safe harbor.

If an accurate estimate for 2018 is possible, it is generally advantageous to base your estimated payments on the 90% test rather than the 100%/110% prior year test, as using this prior year test will probably result in an overestimation of your liability unless the 2018 tax turns out to be substantially larger than the 2017 tax.

You may use the worksheet and the tax rate schedule included in the 2018 Form 1040-ES to figure your estimated tax liability and the required annual payment to avoid a penalty under either the 90% current-year or the 100%/110% prior-year liability tests.

Making estimated tax payments. Reduce your 2018 estimated tax liability by expected withholdings from wages, pensions, and annuities. If after withholdings and expected refundable credits your estimated tax is $1,000 or more, you must make estimated tax payments unless the withholdings and refundable credits will cover at least 90% of your estimated 2018 liability or 100%/110% of your 2017 liability. If the projected withholdings and credits will not cover the amount required under the 90% or 100%/110% tests, you may pay the balance of the estimated tax with Form 1040-ES vouchers, by credit card or debit card (online or by phone), online by direct transfer from your bank account (“Direct Pay”), or by scheduling payments from your bank account using the Electronic Federal Tax Payment System (EFTPS). Seewww.irs.gov/payments for details on the electronic payment options.

Crediting 2017 refund to 2018 estimated tax. If you are due a refund when you file your 2017 return, it may be credited to your 2018 estimated tax. You may also split up the amount due you. You may take part of the overpayment as a refund. The other part may be credited to your estimate of 2018 taxes. The IRS will credit the refund to the April installment of 2018 estimated tax unless you attach a statement to your return instructing the IRS to apply the refund to later installments.

Check your arithmetic before you apply an overpayment as a credit on your next year’s estimate. If you apply too much, the amount credited may not be used to offset any additional tax due that the IRS determines you owe. For example, your 2017 return shows a $500 refund due, and you apply it towards your 2018 estimated tax. However, the IRS determines that you overpaid only $200 for 2017, not $500. You will be billed for the additional $300 tax, plus interest due; you may not offset the extra tax with the amount credited to 2018.

Farmers or fishermen. In figuring the required annual payment to avoid a penalty for 2018, a farmer or fisherman has to pay only 66⅔% of the 2018 estimated liability, rather than 90%. A penalty may also be avoided by paying 100% of the 2017 tax, provided a tax return covering a 12-month period was filed for 2017; the 110% test for higher-income taxpayers does not apply to a farmer or fisherman. To qualify as a farmer or fisherman for 2018 under these rules, at least two-thirds of gross income for 2017 or 2018 must be from farming or fishing.

27.3 Dates for Paying Estimated Tax Installments for 2018

The four installment dates for 2018 estimated tax are: April 17, 2018; June 15, 2018; September 17, 2018; and January 15, 2019. Later installments may be used to amend earlier ones (27.1). You do not have to make the payment due January 15, 2019, if you file your 2018 tax return and pay the balance of tax due by January 31, 2019.

If you use a fiscal year. A fiscal year is any year other than the calendar year. If you file using a fiscal year, your first estimated installment is due on or before the 15th day of the fourth month of your fiscal year, assuming the 15th day . The second and third installments are due on or before the 15th day of the sixth and ninth months of your fiscal year with the final installment due by the 15th day of the first month of your next fiscal year. If any of these days are on the weekend or a legal holiday, the due date is the next business day.

Farmers and fishermen. Farmers only have to make one installment payment, generally by January 15 of the following year. Instead of making the estimated tax payment for 2018 by January 15, 2019, farmers may file their 2018 returns and pay the total tax due by March 1, 2019. To qualify under these rules, a farmer must receive two-thirds of his or her 2017 or 2018 gross income from farming.

Fishermen who expect to receive at least two-thirds of their gross income from fishing pay estimated taxes as farmers do.

27.4 Estimates by Married Taxpayers

A married couple may pay joint or separate estimated taxes. The joint or separate nature of the estimated tax does not control the kind of final return you can file.

Where a joint estimated tax is paid but separate tax returns are filed, you and your spouse can decide on how to divide the estimated payments between you. Either one of you can claim the whole amount, or you can agree to divide it in any way you choose. If you cannot agree, the IRS will allocate the estimated taxes proportionally according to the percentage of total tax each spouse owes.

If separate estimated taxes are paid, overpayment by one spouse is not applied against an underpayment by the other when separate final returns are filed.

Spouses may make joint estimated tax payments only if they are both citizens or residents of the United States. Both must have the same taxable year. A joint estimate may not be made if they are divorced or legally separated under a decree. If a joint estimate is made and the spouses are divorced or legally separated later in that year, they may divide the joint payments between them under the above rule for spouses who file separately.

Prior-year safe harbor. If you and your spouse file separately for 2017 (as single, head of household, or married filing separately) but expect to file a joint 2018 return, your 2017 total tax for purposes of determining the required 2018 annual payment under the prior-year safe harbor (27.2) is the total tax for both of you on the 2017 separate returns.

If you and your spouse file jointly for 2017 but expect to file separately for 2018, you must figure your share of the 2017 joint return tax to apply the prior-year safe harbor. Figure the tax that each of you would have paid on separate returns for 2017 using your 2018 filing status (single, head of household, or married filing separately). Then divide your separate return tax by the total tax for both separate returns. For example, if you would have paid tax of $7,000 on a separate 2017 return and your spouse would have paid $3,000 on a separate return, your 70% share ($7,000/$10,000) is the share of the 2017 joint return tax that you take into account in applying the prior-year safe harbor. Your spouse’s share of the 2017 joint return tax is 30%.

27.5 Adjusting Your Payments During the Year

If, during the year, your income, expenses, or exemptions change, refigure your estimated tax liability and adjust your payment schedule as shown in the following Examples. Increasing an installment payment cannot make up for an underpayment in a prior period; see Example 2 below. However, withholdings from pay, pensions, and IRA withdrawals can be allocated equally over all four periods, so if you increase withholding at the end of the year you may apply it to earlier periods.

If taxes paid in the previous installments total more than your revised estimate, you cannot obtain a refund at that time. You must wait until you file your final return showing that a refund is due.