22 May If I pay estimated taxes to N.J., what about to the IRS?

Q. I just read your story: “How can I stop owing the IRS every year?”  We owed the IRS last year (2023) both federal and state. We had to pay interest to New Jersey but not the feds so we are paying estimated taxes to New Jersey. Should we also pay federal estimated taxes? If so, is it too late to start even though the first quarter due date has already passed?
— Taxpayer

A. If you don’t pay enough in taxes throughout the year, it’s possible you could end up owing penalties and interest.

That’s where estimated taxes come in.

Based on the information provided, you likely didn’t owe an underpayment penalty on the federal side even though you owed taxes because you met one of the safe harbors or another exception, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

He said federal safe harbor rules for 2023 were you paid at least 90% of the tax owed on your 2023 federal return.

A second safe harbor is that you paid 100% (AGI < $150,000) or 110% (AGI > $150,000) of your 2022 tax shown on your 2002 return, Maye said.

Also, there is no 2023 penalty for tax year 2023 if balance due with federal return was less than $1,000 or if a U.S. citizen taxpayer had no tax liability for 2022 for a full 12-month tax year, Maye said.

“So, if you are meeting the federal safe harbor, you may not need to make federal quarterly estimated tax payments,” he said.

There are several items to consider.

First, Maye said, for those whose income is seasonal, there is the ability to select the annualized income method which can reduce the penalty.

Taxpayers can also request a waiver for underpayments on IRS Form 2210.

“So if the reader doesn’t meet one of the safe harbor exceptions and their projected tax liability is over $1,000, they can make a double payment for the second quarter and then drop back to regular quarterly payments for the third and fourth quarters,” he said. “Otherwise, they might not need to make federal quarterly estimated tax payments.”

Now on to the State of New Jersey.

The state’s system is set-up as “pay-as-you-go,” meaning you must pay as you earn income throughout the year, Maye said.

“With New Jersey, even if you pay the full liability by the tax return due date, if you owe more than $400 at tax time, you may be charged interest on your underpayment,” he said.

Form NJ-2210 is used to compute the penalty.

“For NJ taxpayers making over $150,000 (married) or $75,000 (married filing separately), there is a safe harbor if 110% of prior year tax bill is paid,” Maye said. “However, there is a bit of a twist to New Jersey safe harbor provision.”

This is what it reads from the Division of Taxation website:

“However, the safe harbor of 110% as required under N.J.S.A. 54A:9-6(d)(3) is not reflected in the provisions of N.J.S.A. 54A: 9-6(c) concerning the calculation of estimated tax penalties and interest. N.J.S.A. 54A: 9-6(c) requires that the actual amount of the underpayment is based on the difference between what was actually paid and either 100% of last year’s tax or 80% of the current year’s tax, whichever is smaller.”

So, Maye said, when finalizing tax returns for the current year, it makes sense to do a tax projection for the following year so that a truer picture of one’s tax liability can be determined for planning for the following tax year.

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This story was originally published in May 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.