- quote -

This is really very simple. Add up your withholding, salary
and options, so far this year, plus what you expect for the
rest of the year. Add to that any estimates payments you
have made. Does that total more than your total taxes last
year? (110% of last year's tax if your AGI lasy year was
over $150K). If so, you don't have to pay any more. If
not, there's several things you can do to avoid a penalty
including applying withholding in the quarter it was
incurred instead of averaging, or increasing your
withholding to make up any deficiency, or continuing with
installments. If you can't figure it out, we'll help, but
we have to know some figures.

ed

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<129cd743sk88oca[at]corp.supernews.com> wrote:
- quote -

If you haven't made the estimated tax payment yet, can you
increase your withholding for the rest of the year by enough
to cover it? (E.g. increase your monthly withholding by 1/6 of
the estimated tax payment)? Then you have money longer (use
the money you would have paid in estimated taxes now to
replace the money withheld), and you're safer from the penalty
for underpayment.

Seth

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ed wrote:

- quote -

Ding! Well, 1/2 of 100% or 110% of last year's tax,
whichever is applicable. My mistake. Thanks for pointing
this out.

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Gil Faver wrote:

- quote -

Well, both!

I think I made that clear when I wrote: "This is the first
time in 35 years that I am making estimated tax payments
instead of simply relying on withholding". So yes, I am
making periodic est tax payments per Form 1040-ES.

But I also noted that I "exercis[ed] employee stock options
(wage income subject to withholding)". So yes, I also have
some payroll withholding.

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Katie and others wrote:

- quote -

Yes. I'm afraid I made two contradictory statements, and
only one was correct. My fault for misleading you.

I wrote:

- quote -

That was an exaggeration. I don't know what I was thinking
when I wrote that. Klunk!

Then I wrote:

- quote -

That was the correct statement. Working through Part I, I
would check "Yes, you may owe a penalty" in line 9.

Thanks for the responses so far. I apologize for misleading
you.

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- quote -

I think the OP should clarify that he is talking about
payroll withholding, and not Quarterly Estimated Tax
Payments. If not withholding, the answer may change.

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nomail1983[at]hotmail.com wrote:

- quote -

Your first payment will be O,K. and you should size #2
payment (June 15) with the AI method, which will probably
have you pay 1/2 of last year's tax, minus whatever you paid
in the first installment. You are correctly calculating the
annualized installment for the second quarter, HOWEVER, the
AI method will not use that figure when it is more than 1/2
your last year's tax.

If you already paid in withholding and estimates more than
last year's tax, or more than 90% of what this year's tax
will be, you don't owe any more until next April. The
withholding on your stock options will average over all 4
quarters, so you probably didn't underpay the first quarter,
even on the Regualr or Short Method. You probably didn't
have to make the ifrst installment at all.

Get a 2210 tax calculator downloaded from the net and it
will do all the calculations for you and computet the
correct amount of installment to pay each quarter.

ed

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Errata .... A couple of typos, one might be material ....

I wrote:

- quote -

The "one-time __windfall__".

- quote -

"I do __not__ qualify".

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nomail1983[at]hotmail.com posted:

- quote -

[elided for brevity]

I'm stopping your query at this point, because you've just
given enough information to confirm that you will not have
to pay a penalty.

Withholding payments are always "considered to have been
made evenly throughout the year" for purposes of computing
compliance with timely payments. Therefore, so long as your
total tax withheld meets or exceeds the total tax due, there
will be no penalty.

You don't need to be concerned with Form 2210, or any other
penalty issues, because your own facts reveal that you will
not be subject to a penalty for underpayment or late
payment.

Bill

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<nomail1983[at]hotmail.com> wrote:

- quote -

Then there's no problem. If total tax minus withholding is
less than $1,000 there's no estimated tax penalty, even if
all the withholding happened on December 31. See IRS
Publication 505.

--
Phil Marti
Clarksburg, MD

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nomail1983[at]hotmail.com wrote:

- quote -

If your withholding (including the withholding on the
options) covers your entire tax liability for the year, you
will have no underpayment penalty. Withholding is treated
as if it had been paid evenly over the year, regardless of
when it was actually paid.

Katie in San Diego

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This is the first time in 35 years that I am making
estimated tax payments instead of simply relying on
withholding. Based on my (perhaps faulty) assessment of the
situation, it appears that I cannot avoid underpayment
penalties when I file next year.

Am I overlooking or misunderstanding something?

During the first payment period, my taxable income, ergo my
est tax, was very low. In the second period, I had a
windfall due to exercising employee stock options (wage
income subject to withholding) and liquidating a large
amount of stock (capital gain; no withholding). The
second-period taxable income is 10 times the first period's.
But the withheld taxes are sufficient to cover my total
expected year-end tax liability, let alone the minimum
payment for the period.

The problem seems to be with the very low first-period
payment. When I look at Form 2210, I do not meet the
safe-harbor conditions in Part I. I do not qualify for the
Short Method in Part II. If I use the Regular Method (Part
IV), the first required installment is about 25% of the
total tax liability -- far more than I actually paid due to
the very low first-period taxable income. If I use the
Annualized Income Method (Sched AI), my actual second-period
payment is substantially less than the computed required
payment because the method would have me multiply the
one-time by 2.4, as if I expect the windfall to continue for
the remainder of the year. (Not!)

So both methods seem to result in a substantial underpayment
penalty. And yet I believe I paid prepaid the taxes in a
timely manner, having paid the full amount of taxes (and
more!) due to the windfall as well as covering my normal
expected taxable income.

Am I misunderstanding Form 2210?

Do I have any other recourse to avoid the "underpayment"
penalty?

According to Form 2210 instructions, there is a procedure
for requesting a waiver of penalty. But based on my
(perhaps faulty) interpretation, I do now qualify. Although
I retired in 2005, I am not yet age 62; nor am I disabled.
The penalty could be waived due to "unusual circumstances".
But the examples are casualty and disaster. I do not know
if "windfall" would qualify ;-).

Do I misunderstand the waiver and its (in)applicability to
me?

If any tax professionals in this forum have experience with
similar situations (I would think it is not so uncommon), I
would appreciate any guidance in understanding how I might
(legally) avoid the underpayment penalty, given that I
believe I have indeed followed the "pay as you go"
principle. (That is, I am not attempting any kind of
tax-avoidance scheme whatsoever.)

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