The safe harbor rule provides guidelines for how much you must pay in estimated taxes to avoid penalties and interest.
The rule is as follows – you may pay either one of the following:
- 100% of your prior year tax liability (110% if AGI is greater than $150,000 MFJ or $75,000 MFS); or,
- 90% of your current year tax liability
Since it is difficult to know your current year tax liability, we recommend almost always paying in 100% of your previous year liability, unless you know that your income has substantially dropped in the current year.
Make sure your tax preparer produces your estimate payments based off of safe harbor each year.