Just ahead of the April 15 first quarter estimated tax due date, the IRS has posted an item on its website explaining how overpayments on returns due May 17 will be applied to 2021 estimated taxes:
To the extent an overpayment of the 2020 tax exists as of April 15, 2021 (because payments made on or before April 15, 2021, exceed the 2020 tax liability), and the taxpayer makes a valid election to apply the overpayment to 2021 estimated tax, the overpayment would be applied as of April 15, 2021, whether the 2020 return is filed on April 15, May 17, or October 15, 2021.
To the extent an overpayment of the 2020 tax is attributable to a payment made after April 15, 2021 (including any payment made after April 15, 2021, but on or before May 17, 2021), that overpayment would not be available for crediting as of April 15, 2021, and would be applied as of the payment received date, not as of April 15, 2021.
The good news is that taxpayers who have a 2020 overpayment already big enough to cover the 2021 first quarter payment can do so without penalty.
The bad news is that taxpayers who don't have that big of an overpayment and will extend will either have to spend time and money preparing a separate estimated tax payment, or accept the potential of a one-month underpayment penalty. Given that most taxpayers pay first quarter estimates based on prior year taxes, this also imposes penalties on taxpayers who determine their 2020 taxes between April 15 and the May 15 due date.
Absent large estimated tax payments, it is unlikely to be cost-effective to spend professional time computing an early estimate. For example, a taxpayer with a $10,000 individual estimated tax payment made on May 17 this year, instead of April 15, would incur a penalty of about $25.
Related: Tax News & Views Do it in Pencil Roundup
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