This article is reproduced with permission from Spidell Publishing, Inc.
Planning estimated taxes for 2018 federal returns is a serious challenge, with massive changes and many unknowns. For federal returns, relying on the prior-year safe harbors may result in an overpayment, but if the taxpayer is underpaid, there would be no penalty.
With minor exceptions, California has not conformed to any of the federal changes. There has been no legislation introduced to conform to any of the federal changes. So, where does that leave us for California? It leaves us in the same place as any other year. In most cases, taxpayers can rely on the prior- year safe harbor (see next page). But there are some unique California exceptions that might cause problems or offer relief.
Retroactive Law Change
California law provides an exception to the estimated tax underpayment penalty that results when a law change retroactively increases a taxpayer’s estimated tax payments. The exceptions only apply to California law changes chaptered during the taxable year of the underpayment, therefore; it does not apply to federal law changes that may create an underpayment of state tax.
Prior-year Safe Harbor
California conforms with modifications to Internal Revenue Code (IRC) Section 6654, which provides generally for the penalty for failure to pay estimated taxes. In addition, IRC Section 6654 provides for installment due dates, the amounts of the required installments, and exception including the annualized income installment method. California also conforms to these federal provisions (using California amounts and installment percentages):
- The “required annual payment” is 90% of the tax shown on the return for the taxable year or 100% of tax shown on the return for the preceding taxable year, and
- The 100% prior-year tax is increased to 110% if the taxpayer’s prior-year adjusted gross income (AGI) exceeds $150,000 or $75,000 for married filing separately (using California AGI).
However, individuals with AGI of $1 million ($500,000 for married filing separate) or more must pay 90% of their current-year tax and may not use the prior-year safe harbor for California purposes.
Underpayment Penalty Nonconformity Loophole
California does not assess an underpayment penalty on the current year if, in the prior year, the taxpayer had a liability (minus credits for withholding, but not including estimated tax payments) of $500 or less ($250 for married filing separately). This means that a taxpayer whose prior-year withholding covered the tax could have no withholding or estimates paid in the current year and owe no penalty. This provision also applies to a taxpayer whose AGI equals or exceeds $1 million. The FTB has programmed its computer system to consider this provision when assessing the penalty.
Estimated Tax Installments for Individuals – California Percentages
- 1st quarter 30%
- 2nd quarter 40%
- 3rd quarter 0%
- 4th quarter 30%
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