Illinois Estimated Tax Payments and Lumpy Income

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
sparky123
Posts: 72
Joined: Mon Nov 20, 2017 8:14 am

Illinois Estimated Tax Payments and Lumpy Income

Post by sparky123 »

I got a penalty for an Illinois estimated tax underpayment and it doesn't seem right. I worked until April 2020 and then retired. I didn't make much money but I withheld a lot of tax. Like quadruple what I owed for earned income. I knew then I would move some money around later in the year and incur some capital gains tax. Who knew then the market would skyrocket in the middle of a pandemic? I didn't. So second and third quarters I got some capital gains, but the tax I withheld from my earlier paychecks would cover it. The fourth quarter I got a bunch of capital gains, much more than I ever expected. I sent in an estimated tax payment for the fourth quarter that paid off all tax due plus fifty bucks. My tax statement divided my total year's income into four equal pieces and charged me penalties. How was I to know in Q1, Q2, and Q3 the exact magnitude of what would would happen in Q4? I can estimate in good faith and pay it all in Q1. That is what I tried to do and got dinged anyway. I was actually ahead on tax due for Q1 and Q2. Shouldn't they be paying me a penalty?
In summary, does lumpy income excuse a lack of clairvoyance?
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by MrJedi »

I'm not an expert with Illinois specifically, but usually there's a regular or long method to quarterly payments if you have lumpy income. It involves breaking down your income into each quarter to calculate the tax for each quarter. The shorter/default method is usually 4 equal quarterly installments since it is much simpler. It sounds like you need the longer, more complicated form/worksheet for Illinois if there is one.
2cents2
Posts: 648
Joined: Sun Mar 02, 2014 10:31 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by 2cents2 »

I don't know anything about IL taxes, but I wondered if IL has an equivalent type form to the 2210 federal form>>

Google provided these links:

https://www2.illinois.gov/rev/forms/inc ... -Instr.pdf
https://www2.illinois.gov/rev/forms/inc ... L-2210.pdf

From the instructions, "Annualized income installment method:If your income was not received evenly throughout the year, you may be able to lower or eliminate the amount of your required installments by using the annualized income installment method in Step 6. If you choose to annualize your income in Step 6, you must use this method for all four installments"
Topic Author
sparky123
Posts: 72
Joined: Mon Nov 20, 2017 8:14 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by sparky123 »

Thanks for the replies. I am going to visit my tax preparer later this week and I will ask if there is a better way.
MMiroir
Posts: 849
Joined: Sun Mar 29, 2020 12:14 pm

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by MMiroir »

sparky123 wrote: Mon Apr 19, 2021 12:27 pm Thanks for the replies. I am going to visit my tax preparer later this week and I will ask if there is a better way.
Move out of Illinois. That fixes most problems.
Topic Author
sparky123
Posts: 72
Joined: Mon Nov 20, 2017 8:14 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by sparky123 »

I visited my tax preparer today and they said their software couldn't account for 'lumpy' income. In short, my income by quarter was about 10%, 10%, 10%, 70%. I paid taxes by quarter of 25%, 5%, 0%, 70%. The 30% was from payroll deductions, I only worked four months The 70% was an estimated tax payment, the only estimated tax payment I made for that year. In total I paid all that I owed on or before the quarter it was due.
The tax preparers software spread the tax due equally over the four quarters, and somehow said I underpaid even on the first quarter! The state sent me a notice saying there was an error in the forms and my penalty would be reduced. There were no details. other than the amount.
Would HR Block be able to fix this? Any idea what they would charge? Is there any tax preparation software I could buy that could account for 'lumpy' income? I will definitely have uneven income in the future and won't know the amounts until it happens.
p.s. I don't think I got any penalties from the feds. Perhaps due to safe harbor rules?
p.s.s. Moving out of Illinois is at the top of my to-do list.
Murgatroyd
Posts: 488
Joined: Sun Jan 21, 2018 7:23 pm

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by Murgatroyd »

If I recall correctly, Illinois requires each quarterly payment to be identical.
MarkNYC
Posts: 2986
Joined: Mon May 05, 2008 7:58 pm

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by MarkNYC »

Murgatroyd wrote: Wed Apr 21, 2021 6:13 pm If I recall correctly, Illinois requires each quarterly payment to be identical.
Neither Illinois nor any other state has a requirement that each quarterly payment be identical. Such a requirement would be nonsensical.
lstone19
Posts: 2353
Joined: Fri Nov 03, 2017 3:33 pm
Location: Nevada

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by lstone19 »

Murgatroyd wrote: Wed Apr 21, 2021 6:13 pm If I recall correctly, Illinois requires each quarterly payment to be identical.
As MarkNYC said, no such requirement in Illinois. Form IL-2210 line 20, where estimated payments are listed, has room for 12 estimated payments of varying amounts.
Murgatroyd
Posts: 488
Joined: Sun Jan 21, 2018 7:23 pm

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by Murgatroyd »

MarkNYC wrote: Wed Apr 21, 2021 9:38 pm
Murgatroyd wrote: Wed Apr 21, 2021 6:13 pm If I recall correctly, Illinois requires each quarterly payment to be identical.
Neither Illinois nor any other state has a requirement that each quarterly payment be identical. Such a requirement would be nonsensical.
See link: https://www2.illinois.gov/rev/individua ... ments.aspx

Equal installments cited twice. Key phrases:
a. Estimated tax payments are payments of income tax that are required to be paid evenly throughout the year.

b. Your first estimated payment is due by April 15 of the current year. You may either pay all your estimated tax at that time or pay your estimated tax in four equal installments that are due on...

And, yes, I paid a small penalty once.
Murgatroyd
Posts: 488
Joined: Sun Jan 21, 2018 7:23 pm

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by Murgatroyd »

lstone19 wrote: Wed Apr 21, 2021 10:23 pm
Murgatroyd wrote: Wed Apr 21, 2021 6:13 pm If I recall correctly, Illinois requires each quarterly payment to be identical.
As MarkNYC said, no such requirement in Illinois. Form IL-2210 line 20, where estimated payments are listed, has room for 12 estimated payments of varying amounts.
See link: https://www2.illinois.gov/rev/individua ... ments.aspx

Equal installments cited twice. Key phrases:
a. Estimated tax payments are payments of income tax that are required to be paid evenly throughout the year.

b. Your first estimated payment is due by April 15 of the current year. You may either pay all your estimated tax at that time or pay your estimated tax in four equal installments that are due on...

And, yes, I paid a small penalty once.
FoolMeOnce
Posts: 1392
Joined: Mon Apr 24, 2017 11:16 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by FoolMeOnce »

[Edit: I guess I was wrong]

Wow, that is a silly rule. I just read the statute and it looks like the "underpayment" penalty, generally, is based on the amount that any quarterly installment falls below 25% of the total estimated tax due, even if you overpayed in total. So if you have an unexpected Q4 lump of income, you can make a big Q4 estimated installment to avoid a Q4 penalty, but will be penalized for Qs 1-3. Ridiculous.
Last edited by FoolMeOnce on Thu Apr 22, 2021 8:53 am, edited 1 time in total.
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by MrJedi »

FoolMeOnce wrote: Thu Apr 22, 2021 8:19 am Wow, that is a silly rule. I just read the statute and it looks like the "underpayment" penalty, generally, is based on the amount that any quarterly installment falls below 25% of the total estimated tax due, even if you overpayed in total. So if you have an unexpected Q4 lump of income, you can make a big Q4 estimated installment to avoid a Q4 penalty, but will be penalized for Qs 1-3. Ridiculous.
When I skim through IL-2210 and instructions, it looks like you can use the annualized income method to figure the tax due at each quarter. I believe the penalty will be calculated to zero if this is filled out correctly. This is very similar to the federal method. It's also quite a pain to fill out.

https://www2.illinois.gov/rev/forms/inc ... -Instr.pdf
https://www2.illinois.gov/rev/forms/inc ... L-2210.pdf
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by MrJedi »

Murgatroyd wrote: Thu Apr 22, 2021 8:09 am
lstone19 wrote: Wed Apr 21, 2021 10:23 pm
Murgatroyd wrote: Wed Apr 21, 2021 6:13 pm If I recall correctly, Illinois requires each quarterly payment to be identical.
As MarkNYC said, no such requirement in Illinois. Form IL-2210 line 20, where estimated payments are listed, has room for 12 estimated payments of varying amounts.
See link: https://www2.illinois.gov/rev/individua ... ments.aspx

Equal installments cited twice. Key phrases:
a. Estimated tax payments are payments of income tax that are required to be paid evenly throughout the year.

b. Your first estimated payment is due by April 15 of the current year. You may either pay all your estimated tax at that time or pay your estimated tax in four equal installments that are due on...

And, yes, I paid a small penalty once.
From your same link:
If you do not receive your income evenly throughout the year or if you must begin making estimated payments in mid-year, see Form IL-2210, Computation of Penalties for Individuals, for further details on annualizing your income.
This would be the method to reduce your penalty to zero.
Murgatroyd
Posts: 488
Joined: Sun Jan 21, 2018 7:23 pm

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by Murgatroyd »

FoolMeOnce wrote: Thu Apr 22, 2021 8:19 am Wow, that is a silly rule. I just read the statute and it looks like the "underpayment" penalty, generally, is based on the amount that any quarterly installment falls below 25% of the total estimated tax due, even if you overpayed in total. So if you have an unexpected Q4 lump of income, you can make a big Q4 estimated installment to avoid a Q4 penalty, but will be penalized for Qs 1-3. Ridiculous.
For sure. I’ve lived in 6 states, they all have silly rules whether state or local. And, of course, in general they all have pluses and minuses as places to live. :beer
lstone19
Posts: 2353
Joined: Fri Nov 03, 2017 3:33 pm
Location: Nevada

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by lstone19 »

Murgatroyd wrote: Thu Apr 22, 2021 8:09 am
lstone19 wrote: Wed Apr 21, 2021 10:23 pm
Murgatroyd wrote: Wed Apr 21, 2021 6:13 pm If I recall correctly, Illinois requires each quarterly payment to be identical.
As MarkNYC said, no such requirement in Illinois. Form IL-2210 line 20, where estimated payments are listed, has room for 12 estimated payments of varying amounts.
See link: https://www2.illinois.gov/rev/individua ... ments.aspx

Equal installments cited twice. Key phrases:
a. Estimated tax payments are payments of income tax that are required to be paid evenly throughout the year.

b. Your first estimated payment is due by April 15 of the current year. You may either pay all your estimated tax at that time or pay your estimated tax in four equal installments that are due on...

And, yes, I paid a small penalty once.
Well, they may say it but there is no penalty (other than normal underpayment of estimated taxes penalties) for not doing so. The penalty calculation, although done differently than how federal income tax is done on 2210, ends up ultimately being the same methodology. And Illinois allows annualized income.

Whereas federal 2210 applies estimated payments to the calculation of did you pay enough each quarter, Illinois considers only withholding for that phase. Estimated payments are then applied to any deficiency during the penalty calculation. In the end, it works out the same. There is no place where there is an additional penalty for not making equal payments nor does IL-2210 even ask if you made estimated payments.

I guess I've been paying that huge zero dollar penalty for not making equal payments for years. :-)
Topic Author
sparky123
Posts: 72
Joined: Mon Nov 20, 2017 8:14 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by sparky123 »

Istone19, do you fill out your tax forms by hand or use software?
MarkNYC
Posts: 2986
Joined: Mon May 05, 2008 7:58 pm

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by MarkNYC »

Murgatroyd wrote: Thu Apr 22, 2021 8:09 am
lstone19 wrote: Wed Apr 21, 2021 10:23 pm
Murgatroyd wrote: Wed Apr 21, 2021 6:13 pm If I recall correctly, Illinois requires each quarterly payment to be identical.
As MarkNYC said, no such requirement in Illinois. Form IL-2210 line 20, where estimated payments are listed, has room for 12 estimated payments of varying amounts.
See link: https://www2.illinois.gov/rev/individua ... ments.aspx

Equal installments cited twice. Key phrases:
a. Estimated tax payments are payments of income tax that are required to be paid evenly throughout the year.

b. Your first estimated payment is due by April 15 of the current year. You may either pay all your estimated tax at that time or pay your estimated tax in four equal installments that are due on...
Let's suppose my income is even throughout the year such that I need to pay at least $12K for the year, which would be $3K in equal quarterly payments. If I make quarterly payments of $6K - $5K - $4k - and $1K for a total of $16K, does anyone think there would be a penalty for violating IL's "requirement" that quarterly payments be paid in four equal installments?

There are an unlimited number of scenarios where unequal estimated payments to IL would result in no penalty.
User avatar
quantAndHold
Posts: 10141
Joined: Thu Sep 17, 2015 10:39 pm
Location: West Coast

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by quantAndHold »

sparky123 wrote: Wed Apr 21, 2021 5:27 pm I visited my tax preparer today and they said their software couldn't account for 'lumpy' income. In short, my income by quarter was about 10%, 10%, 10%, 70%. I paid taxes by quarter of 25%, 5%, 0%, 70%. The 30% was from payroll deductions, I only worked four months The 70% was an estimated tax payment, the only estimated tax payment I made for that year. In total I paid all that I owed on or before the quarter it was due.
The tax preparers software spread the tax due equally over the four quarters, and somehow said I underpaid even on the first quarter! The state sent me a notice saying there was an error in the forms and my penalty would be reduced. There were no details. other than the amount.
Would HR Block be able to fix this? Any idea what they would charge? Is there any tax preparation software I could buy that could account for 'lumpy' income? I will definitely have uneven income in the future and won't know the amounts until it happens.
p.s. I don't think I got any penalties from the feds. Perhaps due to safe harbor rules?
p.s.s. Moving out of Illinois is at the top of my to-do list.
It sounds like your tax preparer either needs new software, or needs to learn to use the software he has. I know TurboTax can do this (I hit this every year on my California taxes), but TurboTax does the wrong thing by default, so I always have to go digging through the software to fix it.
Murgatroyd
Posts: 488
Joined: Sun Jan 21, 2018 7:23 pm

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by Murgatroyd »

Folks, there is a “safe harbor” rule that would prevent most taxpayers from incurring this issue: “ However, if you pay at least 90 percent of this year's tax or 100 percent of last year's tax in four equal timely installments, you may not be subject to this penalty.”

I don’t know what OP or anyone above full situation is.

I ran afoul of it in my first full year of retirement when my previous employer paid out an unexpected bonus via a contribution to my by then empty 401k. I closed it a second time by distribution in cash rather than roll it over and even though I more than offset the tax liability with my fourth quarterly payment, I got the penalty. All using Turbo Tax.
User avatar
quantAndHold
Posts: 10141
Joined: Thu Sep 17, 2015 10:39 pm
Location: West Coast

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by quantAndHold »

Murgatroyd wrote: Thu Apr 22, 2021 10:33 am Folks, there is a “safe harbor” rule that would prevent most taxpayers from incurring this issue: “ However, if you pay at least 90 percent of this year's tax or 100 percent of last year's tax in four equal timely installments, you may not be subject to this penalty.”

I don’t know what OP or anyone above full situation is.

I ran afoul of it in my first full year of retirement when my previous employer paid out an unexpected bonus via a contribution to my by then empty 401k. I closed it a second time by distribution in cash rather than roll it over and even though I more than offset the tax liability with my fourth quarterly payment, I got the penalty. All using Turbo Tax.
I don’t know about Illinois, but California’s safe harbor rules are definitely different than the federal rules. And using the safe harbor rules gives a lot of interest free money to the government for a long time for no reason, when I don’t know if I’m even going to have income for the year.

I’ve into OP’s problem multiple years on my California taxes, by doing Roth conversions in December. TurboTax will do the right thing, but it doesn’t do it by default. You have to dig through the estimated payments section and tell it to annualize.
Topic Author
sparky123
Posts: 72
Joined: Mon Nov 20, 2017 8:14 am

Re: Illinois Estimated Tax Payments and Lumpy Income

Post by sparky123 »

OK, next year it is TurboTax
Post Reply