What is tax liability?

Does it ever make sense to pay estimated tax on your full year tax liability even if it is beyond what you need to pay as estimated tax?

• This question is for the small group of us lucky enough to have earned millions from a startup exit this year.  It seems the "safest" investment is to pay the full tax liability up front.  Otherwise you are gambling with money that you'll eventually owe to the government.  With interest rates so low, it doesn't seem worth the risk/effort of spreading it around to multiple banks to stay below FDIC limits.  Any thoughts (legally non advice) is appreciated.

• Answer:

  Yes, you can pay the full tax liability up front - realizing that you are making an interest-free loan to the IRS when you do so. Although the IRS recomputes the underpayment penalty each quarter, overpayments from previous quarters carry over, and you won't be subject to penalty by paying early. If you don't want to run the risk of not being able to pay the IRS later, you can certainly pay now. Realize, however, that you might not be required to pay estimated taxes at all. You pay estimated taxes only when you need to avoid a penalty for underwithholding. If you expect to have at least 100% of your 2011 tax bill withheld from your other wages in 2012 (or 110% if your 2011 AGI was over $150,000), then there will be no penalty and no need to pay estimated taxes. You may want to have money withheld up front, as you indicate, but there may be no need for you to do so. Realize, also, that if you are required to pay estimated taxes, and assuming that you received the money after March 31, 2012, you will need to use the annualized income method to compute your estimated tax payments, rather than the regular installment method. See chapter 2 of IRS Publication 505, http://www.irs.gov/publications/p505/ch02.html, for a fuller description.