California Tax Planning Part 2 – Estimated Tax Payments for High Income Taxpayers

High income taxpayers have two sets of estimated tax payment rules that apply to them – federal rules and California rules.  Under the federal rules, high-income taxpayers have to pay in the lesser of 2 numbers in equal installments before the end of the tax year:

(1) 90% of the current year’s liability; or

(2) 110% of the previous year’s liability (non-high income taxpayers use 100% instead of 110%).

However, under California law, high income taxpayers with more than $1 million of AGI must pay in 90% of the current year’s liability, as these taxpayers are ineligible for the prior-year safe harbor.  Furthermore, unlike federal, California taxpayers must front load their estimated tax payments in the 1st and 2nd quarters (30% and 40% in each, with the remaining 30% due in the 4th quarter).

It may seem simple, but I find that many tax preparers are not adequately (or at all) instructing their clients about their responsibility to pay estimated tax payments.  Failure to pay in your estimated tax payments results not only in big tax bills in tax season, but also non-deductible penalty payments.  With bank savings account interest rates hovering around next to nothing, it is a no-brainer to pay in your estimated taxes as required and avoid penalties in tax season.

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