In which we pay an estimated tax penalty

So, last year, with DH’s unemployment and our various deductions, we ended up getting $500 back from the government at tax time, even though we hadn’t paid in estimated taxes.  So this year we figured we weren’t required to pay estimated taxes because Turbo Tax said we hadn’t last year.  We were wrong.  Why?

1.  One of my legacy stock funds (American Century Trust from back when my father took care of my investments) decided to sell parts of itself and cause a capital gain of 6K which it then reinvested in itself.  It did this last year but only for 2K and hadn’t done it for the previous 12+ years so I thought last year was an aberration.  I was wrong.  Now I want to sell the entire thing so I don’t get these surprises each year.  (On the plus side, when I investigated last year, this capital gains thing they do lowers the capital gains that will accrue when the stock is actually sold.  Still, unlike my father, I prefer my investments to be simple and predictable.)

2.  I was stupid and made major charitable donations Jan 2015 instead of Dec 2014 because I didn’t understand our state tax situation for next year because … yes I know I have a phd in economics don’t judge me.  (I suspect Brigitte Madrian thinks I’m stupid too.  This is one of my great sorrows in life.)

3.  The stupidest of the stupids… I ridiculously assumed that if we claimed 0 deductions on withholding that the government would take out about the right amount of tax for our income so I wouldn’t have to think about taxes on the wage part, just the non-wage income income.  That is apparently seriously untrue.  Yes I know we are how old and never realized this before… but we never had to stop paying estimated taxes for a year and then start up again (and we had bigger mortgage tax deductions…).  Gov’t withholding  on your wages is not enough once you hit a high enough income.  I don’t know why I assumed it would be… it’s not like they can take out larger percentages of your paycheck as your income goes up.  [Update:  The gov’t DOES take out the appropriate amount of income if you’re single (and work steadily).  And the way it does it is by taking a larger % out of larger paychecks (unlike Social Security which takes out the same % and then just stops when you hit the cap).  The gap between monthly payments as a single vs. as a married is substantial and at my income level seems to be assuming that the spouse is earning less.  Which, in this case, he really isn’t.]

4.  We’ve never actually made more than 150K/year before and hit the tax penalty.  So we thought we only had to pay 100% of last year’s tax, which we were sure we’d do because DH has been employed all year instead of unemployed half the year… turns out we actually needed to pay 110% of last year’s tax.  And somehow we paid something like 108% of last year’s tax, give or take.

Add to that are the things we knew were changing, like less housing interest, and it turns out we both owe the government a pretty hefty 4 figure check and have incurred a penalty of $31.  It’s a good thing we’ve been saving up.

By the time we figured this all out, I was basically like, $31?  Screw it.  (Should we figure out if we can pay estimated taxes for 2014 now to eliminate the penalty?  Whatever.  Screw it.  It’s $31.  Which feels like nothing when you’re already writing a check for over $6K.  Even though it really isn’t nothing, I’d pay $31 not to have to think about taxes anymore this year.)

Apparently if we pay our tax bill early, we can cut the penalty to $21.  At least according to TaxAct.

Now to figure out the estimated taxes for next year… because there’s nothing like following up a huge check with another huge check.  But hey, rich people problems.  If only I didn’t feel so dumb.

40 Responses to “In which we pay an estimated tax penalty”

  1. Holly@ClubThrifty Says:

    I’m sorry you had to pay a penalty!
    My brain starts to fry any time I try to interpret our complex tax code. Thank goodness my husband knows what is going on. But even though he does, we still end up overpaying every year somehow.

  2. omdg Says:

    I am not even going to get into the obscenely irritating mess that is our taxes this year 2/2 my husband cashing ot a bunch of stock options last year and me making (marginally) more money. However, fortunately overall these are all good problems to have, right? (Or so I am telling myself.)

    When I was getting a fellowship for MD-PhD I was told that I had to pay estimated taxes. Since my husband and I filed jointly I just had him have his employer withhold the amount from his paycheck so that we wouldn’t have to file quarterly. That seemed to work pretty well. This year we stopped doing that because 1) I got a real job that withholds taxes for me and 2) I got tired of giving the government an interest free loan every year. However my parents suggested doing this if you think you might have a bunch of capital gains. Which you might since the markets have been doing well of late.

  3. Linda Says:

    2015 will be the first year I won’t have the mortgage deduction or any business deductions for using part of my house for business. ( I had those deductions for the last five years since I was either renting out bedrooms to individual roommates or as an Airbnb host). I should talk to the accountant after tax season to find out if I need to pay in any more taxes.

    Ex-husband and I got hit with a huge tax bill and penalty during our first year of marriage because we didn’t have our with-holding set correctly. (I seem to recall it being around $8,000.) Ever since then I’ve really not minded overpaying a bit and getting a refund each year. I’d rather that than another one of those scary tax bills.

  4. Leah Says:

    Apparently, you’re now in the crowd that is “rich enough” that you should just have an accountant regularly look at your numbers (outsourcing and all). What does it say about our tax code when a PhD in Econ struggles with doing everything correctly?

    For my part, I’m stoked that this appears to be the first year in my entire life where I have just one W-2. My withholdings always get messed up, so I can potentially use this situation to figure out just how much I actually should have withheld from my paycheck. And while I know I lose interest by doing so, I’d rather have a bit too much withheld than not enough.

  5. Thisbe Says:

    I am having a certain amount of tax-related anxiety; I am pretty sure we will owe a largeish 4-figure tax bill too. I honestly had no idea that government witholding would be so inadequate! We’ve never made this much money before. I don’t mind paying taxes, and it’s not going to be a problem to do it. I actually feel reassured hearing that your penalty was $31, I was vaguely doomful and worried that tax penalties might be a lot more.

    We have a legacy investment that as far as I can tell does not appreciate or supply any income, cannot be sold currently (no really – can’t be done) AND (we were startled to find out last year) caused a pretty large additional tax liability. Oof. Also, our taxes are currently waiting on nothing but the documentation from this investment, which will be supplied to me at some later date (I guess whenever they feel like it?).

    But I feel so much better knowing that even if I have to pay a penalty, it probably won’t be too large. Thanks!

    • nicoleandmaggie Says:

      That sounds like the situation I was in when we found out that my father had put PG&E stocks in my name and the company had just declared bankruptcy. Big tax bill, nothing to sell to pay the taxes.

      I hope your penalty is small (or non-existent– you usually get a year of leeway the first time you were supposed to pay estimated taxes but didn’t… so long as you paid 100%-110% of last year’s taxes depending on your income)!

  6. Ana Says:

    oh goodness. We are going to do our taxes tonight and now I have major anxiety. I have no understanding whatsoever of the tax code. I just plug the numbers into the program and hope for the best. So far we’ve never had to pay more than $500 at the end of the year (actually the last three years were the first time we didn’t get refunds on our federal tax, for some reason we’ve always had to pay some ridiculous $6-$60 or so for state taxes every year) And our “capital gains” are generally ridiculously low on the few non tax-advantaged accounts we have. But my husband did get a pretty large dividend payout for the first time on the one stock he owns, so that may be an issue. we’re also using tax act for the first time, so that’s another source of anxiety for me (though it saved us $40 vs. turbo tax premium)

  7. Susan Says:

    I’m very happy to be paying several thousand to recapture depreciation this year — it means that I successfully sold the albatross condo and am no longer a long-distance landlord. I kept the liquidated equity from that property in cash in part so that I’d be able to pay it.
    Before I entered that sale in, I was up several thousand, I think because my withholdings weren’t matched to my raised 403b contributions and mortgage/property taxes, even though I did raise the withholdings as well this year. Next year my spouse will have earned a lot more, so we’ll split the mortgage/property taxes, and I’ll no longer have a ‘rental business’. It’s hard to keep up with a lot of changes.

  8. chacha1 Says:

    I’m having anxiety about taxes, too. DH made less money last year due to losing 15-20% of his work time to dealing with his mother, and I’m not sure what if any adjustments he made on his estimated tax because he doesn’t give me any financial info till I’m getting ready to do our returns.

    Last year we had to do a capital-gains thing which was very confusing and difficult and maddening because it was for, like, twenty bucks. And the account info didn’t have anything about cost basis.

    I am tempted to turn it all over to an accountant this year and going forward, unless I can get the man to simplify some stuff. Closing the non-tax-advantaged stock account would be a good first start. I’d rather pay capital gains tax once more and then never again, than every year till the end of time on an account worth <$3000.

    • nicoleandmaggie Says:

      I own one share of AOL stock that I will own forever (until AOL goes out of business for good) because the cost-basis is just way too complicated to figure out at this point (it was originally lots of AOL, but then Time Warner bought it… and then Time Warner spit it out… and then other stuff has happened).

      Going forward, I only want to pay capital gains tax because I sold stuff on purpose and set some of it aside to pay the tax! This whole surprise you got capital gains that you didn’t realize… I don’t like it. (Even if it means less capital gains tax later.. if we ever sell.)

      Ugh, so complicated.

      I hope my parents never die because figuring all of this out on their estate is going to be a nightmare among nightmares, even if we can find good help. (Well, there’s other reasons I don’t want them to die, but if I didn’t like them, there would still be that reason.)

      • chacha1 Says:

        My parents are living on my dad’s complicated network of actively-managed investment accounts (he used to be a stockbroker and financial planner). It’s going to be way beyond me or my sister; I don’t intend to even try to sort that out myself.

  9. Cloud Says:

    You’re not dumb. You just prioritized your time… The penalty is annoying, but $21 (if indeed that is what it reduces down to) is a fraction of your hourly wage, and how much time would you have spent figuring out the correct estimated tax? So really, you made a smart decision not to spend that time.

    (That said, I screwed up and didn’t pay my city business license fee on time, and that cost me $100 and I beat myself up about it for a little while. I’m over it now, but I get how crappy paying a fine you didn’t really have to pay feels!)

    When my husband moved here from NZ he was blown away by how much time we spent on figuring taxes. Apparently, in NZ the government withholds at some standard rate and if you think that is probably right you don’t have to file. Or something like that. I’m sure this only worked for him because he didn’t make much money at the time and had no investments… but still, it is a bit mind-blowing to think about. This year, as I spent over an hour figuring out the cost basis for a stock we sold that had undergone a weird spin out/reverse split situation, I realized that I am more annoyed by the cost in time of paying my taxes than the cost in dollars. We probably don’t come close to taking all of the deductions we could take (particularly on my business), because the amount of time to track the necessary data is just not worth it.

    But yeah, as you say: rich people problems. In general, my tax problems all stem from having money, and I can’t really complain.

    • nicoleandmaggie Says:

      The complicated stuff is probably put there so rich people with good accountants can take the maximum advantage.

      • Rosa Says:

        An awful lot of it is so politicians (and recipients) can pretend transfer payments aren’t “welfare”.

        There is no good reason to have run the ACA subsidies through the tax code (which requires predicting the coming year’s income and maybe having to pay back if you make too much money) instead of setting eligibility requirements for a set time based on income history. Or running a chunk of poor people’s benefits through the earned income credit. Or “lowering” higher education costs through various refundable or not refundable tax credits.

      • nicoleandmaggie Says:

        Absolutely on that first statement. :(

    • zenmoo Says:

      Yep. NZ certainly does simple taxes. Our accountant in NZ files for us (because we need to reconcile taxes in Australia & NZ). I got an email saying that my husband should actually pay a bit of tax, but because his pay is all salary & the government withholding got it wrong – he doesn’t need to file. Seriously. The situation in Australia is more complicated – but it sounds like it’s less complicated than in the US. I shall therefore feel *slightly* comforted.

  10. Foscavista Says:

    At least you can do your taxes! Vanguard has not released its brokerage statements yet.

  11. Leigh Says:

    When I first put numbers into TaxAct, it told me that I owed something like $4,000 and a penalty for underpayment of taxes. It turned out that I had somehow not counted my 401(k) contributions as pre-tax, so everything worked itself out. But that was scary for a moment.

    “Gov’t withholding on your wages is not enough once you hit a high enough income. I don’t know why I assumed it would be… it’s not like they can take out larger percentages of your paycheck as your income goes up.”

    This isn’t completely true. I found a PDF on how the amount of tax to be withheld from your paycheck works based on the number of W-4 allowances you list and so long as you are single and all of your income comes from a regular paycheck, no matter how high, it’ll work out fine. It’s when you have other sources of income that it doesn’t work out quite so easily and I suspect it also assumes that both people in a married couple don’t make reasonable income. For example, bonuses seem to be withheld at a flat 25% federal income tax rate, not based on your allowances DESPITE THE FACT IT IS FROM YOUR ONE EMPLOYER.

    • nicoleandmaggie Says:

      Huh. Then something didn’t work out because we have it set to zero (and I think DH has it married-but at single rate, I’m not sure if mine is married but at single rate or not). The research DH did on this seemed to suggest that’s not the case (he said it withholds a flat% that doesn’t work well for people in higher brackets… I don’t remember the exact numbers but we needed something like 20% withheld and it only withheld 15%, give or take a few %) and the withholding calculator says we need to put away an additional amount/month even without the capital gains and dividends.

      Maybe it’s the married part.

    • grmother Says:

      They flat rate it on bonuses, unless you tell them exactly how to do it before the payroll check run is processed, because otherwise the system would assume you will get 24 or 26 checks at the same dollar rate….and the tax implications of that are really killer on a large bonus. Yes, I worked payroll in a prior life.

  12. grmother Says:

    Reminder to your readers: you can set IRS and State withholding to zero deductions Plus An Additional Xdollars each pay period. Because I personally hate and despise estimated payments!

  13. Mrs PoP Says:

    I withhold an extra $200 from each paycheck to offset taxes due from our rental income as well as taxes due on any non-cash compensation (which we often don’t know the value of until November even though we receive the non-cash compensation in April!). So far that’s brought us with a thousand or so each way of our tax liability, which I consider pretty close. But we haven’t (or rather our tax guy hasn’t) calculated the 2014 taxes and 2015 estimates yet. Those will likely be quite complicated, so I’m anticipating changing our withholding again soon for the 2015 year.

  14. ptrish Says:

    Longtime lurker popping in with a similar question…I’m facing a $1000 tax bill, but didn’t contribute at all to any retirement accounts (I’m a student, and do have savings elsewhere, just no official retirement accounts yet.) Can I open one now to decrease the bill? Someone suggested it but I thought that all 2014 tax-related things had to be done in 2014.


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