According to my estimates, I will owe taxes next year come April 15th. I will owe enough taxes that I should be paying estimated taxes. I already missed my 1st payment on April 15th. I didn’t forget. I missed the payment on purpose. I had decided that I rather pay the penalty rather than pay the actual taxes. I made this decision because I believed the penalty rate was determined by the short term fed rate. Given that the short term fed rate is currently sitting at 2.75% as measured by the fed fund rate, I figured I would be doing about the same by leaving the money in a high yield savings account.

In my haste I missed that penalty rate is actually the short term fed rate plus 3%. The total penalty is 6% according to IRS.. So today I made my first estimated tax payment. Even if the penalty rate was the lower rate that I believed it to be, I think I might have still changed my mind and made a payment.

I’m no tax lawyer, and am confused somewhat exactly on how the penalty is assessed. In my original post about filing taxes, I stated that a safe way to determine what the safest minimum payment required by the IRS is 110% of the previous year’s taxes. That’s what I’ve chosen to do. However, if I choose not to make any estimated tax payments at all, do I have to pay the penalty on the full amount that I owe? For example let’s say my taxes last year were $1000, and this year I’m required to make estimated tax payments. I can make pay $1100 in estimated taxes even though I know I’ll owe $2000 in taxes. I pay the remaining balance of $900 on April 15th, and still avoid paying a penalty because made payments that were 110% of my last year’s taxes during the course of the year. However, had I chosen not make any estimated tax payments do I owe a penalty on the full $2000 or the $1100 that I was suppose to make? Since I know I’ll actually owe more taxes than my required estimated taxes, I’ve decided not to find out.