IMPACT OF COVID-19 ON ESTIMATED TAX PAYMENTS

On: November 11, 2020

COVID-19 has had an adverse financial effect on many of our lives.  One such negative impact is that COVID-19 has made it more difficult for taxpayers to meet their tax obligations, including concerning estimated tax payments.

Fortunately, certain relief has been issued, helping taxpayers with their estimated tax payment obligations.

IRS Defers Estimated Tax Payments To July 15, 2020

Federal estimated tax payments are normally due on a quarterly basis, payable on April 15, June 15, and September 15 of the applicable year, and January 15 of the following year.

On March 21, 2020, the Internal Revenue Service announced the deferral of the April 15, 2020 estimated tax payment to July 15, 2020.

On April 9, 2020, the Internal Revenue Service announced the deferral of the June 15, 2020 estimated tax payment to July 15, 2020.

Thus, your Federal estimated tax payments for year 2020 are currently due on July 15, 2020, September 15, 2020, and January 15, 2021.

States Vary In Timing Of Year 2020 Estimated Tax Payments

Taxpayers can also be subject to state estimated tax payment obligations.  States have varied in their requirements concerning the timing of year 2020 estimated tax payments.

Some states have set similar requirements as the Internal Revenue Service.  For example, on March 18, 2020, the State of California Franchise Tax Board announced the deferral of year 2020 first and second quarter estimated tax payments until July 15, 2020.

Other states have deferred just one or none of their required estimated tax payment dates.

You should consult with your applicable state tax authority to determine when your state estimated tax payment obligations are due for year 2020.

Estimated Tax Payments May Be Reduced As A Result Of COVID-19

In determining Federal estimated tax payments, taxpayers generally rely on one of two safe harbors to avoid estimated tax penalties.

First, if you pay 100% of your tax liability for the prior year (110% of your tax liability for the prior year if your adjusted gross income was over $150,000), you will avoid estimated tax penalties (the “prior year estimated tax safe harbor”).

Second, if you pay 90% of your tax liability for the current year, you will avoid estimated tax penalties (the “current year estimated tax safe harbor”).

Because it is a known amount, it is often advisable to rely on the prior year estimated tax safe harbor in paying Federal estimated taxes.  However, if COVID-19 has reduced your income in 2020 from 2019, you may want to follow a different strategy.

With such reduced income, if you use the prior year estimated tax safe harbor, you will likely pay unnecessary estimated taxes relative to your 2020 tax liability.  While you would recover any excess estimated tax payments as a refund when filing your 2020 tax return in 2021, in the interim, you would not have available needed cash flow.

Instead, if you use the current year estimated tax safe harbor, you will likely pay a reduced amount of estimated taxes (closer to your 2020 tax liability) and be able to retain needed cash flow in 2020.

State estimated tax payment rules will vary by state, so you should consult with your applicable state tax authority on this issue.

If you need tax help, always make sure to call Leading Tax Group and don’t attempt to do it yourself.