I filed my taxes in the first week of April. I received paper I Bonds on April 29, just in time to have them earn the 1.76% rate in the first six months as opposed to the lower 1.18% rate. That’s good. The bad news is for the first time in 20 years I’m paying a underpayment penalty. Not a large one, $15, but it still irks me.
The IRS rules say you must pay by withholding or estimated tax payments:
- 90% of your tax liability for the current year; or
- 100% of your tax liability in the previous year (110% if income is over $150k)
I always do an estimate in October to see if I’m safe. If not I would ask the employer to withhold extra. I did the same last year but I didn’t know the "W-2 total YTD" on my paystub didn’t include income from selling ESPP shares even though the employer already knew the shares were sold by then. By the time the employer issued the W-2, the actual number was higher than I projected.
2012 was a great year for my ESPP. I bought the shares at $25 and sold at $45. Because there was no tax withholding on ESPP sale, and my income projection was off, my tax withholding ended up a little short of the 90% threshold.
This is a note for myself and others who run into the same [lucky] situation. Increase payroll tax withholding or pay estimated tax when you have large gains from ESPP sale.