Posted on January 20, 2021

If you make quarterly estimated payments, I hope you made your last one for tax year 2020 last week. The last one was due to the IRS by January 15, and the early data suggest that overall estimated payments will probably be up compared to amounts paid last year, but how much is very uncertain. We need to wait until month’s end for all the checks mailed to the IRS to be counted, but we get a good indication by observing the amounts paid–both electronically and by check–by January 15. For the period from January 1 to January 15, nonwithheld individual income tax payments–largely representing estimated payments at this time of year–were up by 14.4 percent compared to the same period in 2020 (see chart below). That will not be how receipts end up growing for the full month once all quarterly payments are counted. The rest of this post will describe why growth for the full month usually is lower than growth through the 15th, and why we might see healthy growth this year.

Growth across January. We can observe how, often in recent years but not always, growth for all of January is smaller than growth through January 15 (see chart). A major factor in that development stems from electronic deposits of tax payments, which get counted almost immediately upon receipt by the IRS and which have been becoming a larger share of total individual quarterly payments. That means that over the years we have seen bigger and bigger amounts counted by the IRS on the 15th, the day many taxpayers schedule for their electronic payment (why pay early?). That leaves a smaller and smaller share for the remainder of the month from mailed checks, which take time for the IRS to receive and count. In effect, we get a continuing acceleration of payments in January.

Strong Estimated Payments in January? Despite the pandemic-associated recession, there are two reasons I see that will be boosting estimated payments this year. First, as a result of the recent election, some taxpayers may be expecting higher capital gains tax rates starting in 2021, and hence recognized some capital gains (such as by selling appreciated stock) before the end of 2020. Tax payments on those gains would be due by April 15, but taxpayers could reflect those tax amounts in their January 15 estimated payment in order to avoid facing penalties for having paid too little in withholding and estimated payments.

Second, many taxpayers who received unemployment benefits in 2020, which are taxable under the income tax, presumably did not have tax amounts withheld from those benefits. Some may have made quarterly payments in January in order to avoid very large payments when filing their tax returns and possible underpayment penalties.

We’ll keep our eye on these nonwithheld payments for the rest of the month.