Quarterly Tax Filing

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chris319
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Quarterly Tax Filing

Post by chris319 »

Years ago I had an Internet chat buddy (now deceased) who once described his tax strategy to me.

He never filed quarterly tax returns. Instead, he felt it was better to delay paying taxes until April 15, even if it involved paying a penalty. His theory was the money would earn more if he invested it without paying quarterly taxes and the investment returns would more than offset any IRS penalties.

I am about to start collecting a pension and soc sec and have opted for no tax withholding (not sure if this was a mistake). My thinking is that I would be better off paying taxes quarterly rather than following my friend's method or having tax withheld (which amounts to an interest-free loan to the government). My question is, is this the best strategy or would I be better off with withholding enabled or following my friend's strategy? I will be receiving monthly payments from both the pension (life annuity) and soc sec. I plan to set aside an amount every month to cover federal and state income taxes as well as county property tax, and make the state and federal tax payments quarterly. The county bills me in October which is when I pay.

[OT comments regarding the buddy's situation removed by admin LadyGeek]
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vitaflo
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Re: Quarterly Tax Filing

Post by vitaflo »

If you invest the tax money and your investments go down in value, how will you pay your tax liability? There's only two things certain in this life, death and taxes. Pay your quarterlies.
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Callisto
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Re: Quarterly Tax Filing

Post by Callisto »

Paying taxes at the last possible period might make sense, but paying a penalty probably does not. At that point you are basically borrowing from the government, and their loan to you certainly isn't interest free.
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chris319
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Re: Quarterly Tax Filing

Post by chris319 »

My options for a parking place for the tax "set-aside" are as follows:

- Checking account (pays 0.01% interest)

- Savings account (pays 0.01% interest)

- Purchase shares of BND (yield: 2.13%)

So I'm opting for BND.
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chris319
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Re: Quarterly Tax Filing

Post by chris319 »

Callisto wrote: Sun May 16, 2021 8:26 pm Paying taxes at the last possible period might make sense, but paying a penalty probably does not. At that point you are basically borrowing from the government, and their loan to you certainly isn't interest free.
Being retired I will have plenty of time to file a tax return every quarter.

I found a pretty good quarterly tax calculator. It calculates both federal and state tax:

https://www.keepertax.com/quarterly-tax-calculator
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Gill
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Re: Quarterly Tax Filing

Post by Gill »

You can do it all at one time using eftps.gov. I schedule all four payments in April and it’s done for the year. No need to file anything.
Gill
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chris319
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Re: Quarterly Tax Filing

Post by chris319 »

Gill wrote: Sun May 16, 2021 8:40 pm You can do it all at one time using eftps.gov. I schedule all four payments in April and it’s done for the year. No need to file anything.
Gill
Or, I could make payments in advance for the following tax year when I file every April 15. My income would be known as it's pension and ss income, so no need to estimate anything. But now we're back to making an interest-free loan to the government.

Does eftps.gov let you schedule payments in advance so the money is in your account earning interest until they take it for the scheduled payment? And you don't have to do anything every quarter? That sounds pretty slick.

I saw where you could pay either by setting up a payment account with IRS, or you could pay with a credit or debit card. Any suggestion as to which is preferable? I have my electricity bill and HOA dues set up on auto-pay through the bank and I never have to think about them. Edison takes the money directly out of my account. For all other bill payments, the bank actually cuts a printed check which they send by snail mail to the payee. We had a rash of mail thefts a few years go and after that I went to all electronic payments.
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bberris
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Re: Quarterly Tax Filing

Post by bberris »

BND has a 2.13 % distribution yield today. A good portion of that is return of capital, because it includes returns from bonds that have already appreciated from par. To compare BND with, say, a savings account, you should look at the SEC yield, 1.33 %. SEC yield is the expected return from the fund if interest rates don't change. Also noting that BND has the risk and rewards of interest rate changes, while savings account etc do not.
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RickBoglehead
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Re: Quarterly Tax Filing

Post by RickBoglehead »

chris319 wrote: Sun May 16, 2021 9:05 pm
Gill wrote: Sun May 16, 2021 8:40 pm You can do it all at one time using eftps.gov. I schedule all four payments in April and it’s done for the year. No need to file anything.
Gill
Or, I could make payments in advance for the following tax year when I file every April 15. My income would be known as it's pension and ss income, so no need to estimate anything. But now we're back to making an interest-free loan to the government.

Does eftps.gov let you schedule payments in advance so the money is in your account earning interest until they take it for the scheduled payment? And you don't have to do anything every quarter? That sounds pretty slick.

I saw where you could pay either by setting up a payment account with IRS, or you could pay with a credit or debit card. Any suggestion as to which is preferable? I have my electricity bill and HOA dues set up on auto-pay through the bank and I never have to think about them. Edison takes the money directly out of my account. For all other bill payments, the bank actually cuts a printed check which they send by snail mail to the payee. We had a rash of mail thefts a few years go and after that I went to all electronic payments.
To clarify your understanding:

- Each year when you do your taxes, you also should figure out your taxes for the upcoming year. EFTPS doesn't do anything "slick". It merely allows you to make payments to the IRS, either now or in the future. So, you can figure your estimated taxes for the year, and then setup the 4/15, 6/15, 9/15, and 1/15 payments. When these dates are hit, EFTPS will initiate a pull from the designated checking or savings account via ACH to make these payments. You can log in at anytime and change, or delete, these future payments.

To be clear, since your income happens throughout the year, you need to either do withholding on the payments or make estimated payments. Otherwise, as your friend found out, you will owe the IRS penalties for late payment of taxes due.

Payment to the IRS with a debit or credit card has fees.

In addition, you may want to understand better the safe harbor rules. Basically, you need to pay either 90% of the tax you'll ultimately owe or 100% of the prior year's tax.

https://www.irs.gov/publications/p505#e ... 1000194433

If you do underpay, you may need to complete Form 2210 when you file taxes next year. Form 2210 is a real pain to fill out, can be very time consuming.
Last edited by RickBoglehead on Mon May 17, 2021 7:39 am, edited 1 time in total.
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zaboomafoozarg
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Re: Quarterly Tax Filing

Post by zaboomafoozarg »

Depending on the size of the pension, it might not even be necessary.

My grandparents get SS + pension, pay no quarterlies, and still get back a tax refund every April.
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RickBoglehead
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Re: Quarterly Tax Filing

Post by RickBoglehead »

zaboomafoozarg wrote: Mon May 17, 2021 6:53 am Depending on the size of the pension, it might not even be necessary.

My grandparents get SS + pension, pay no quarterlies, and still get back a tax refund every April.
Very true. My in-laws owed nothing each year, and got back money from the state under a homestead exemption.
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pshonore
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Re: Quarterly Tax Filing

Post by pshonore »

Why don't you just figure what your annual tax bill amount is and ask your pension payor to withhold 1/12 of that each month or you could ask SS to withhold each month but the minimum is 7%. Skip all the fuss of estimated payments.
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chris319
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Re: Quarterly Tax Filing

Post by chris319 »

The next quarterly "window" is June 1 - August 31. My retirement begins on May 31 in exactly 2 weeks. So it should be easy to figure my income for that quarter and make an estimated payment accordingly. I can then schedule a couple of payments into the future.
Payment to the IRS with a debit or credit card has fees.
Thank you; that's helpful to know.
you could ask SS to withhold each month but the minimum is 7%. Skip all the fuss of estimated payments.
I'd be back to making an interest-free loan to the government.
ask your pension payor to withhold 1/12 of that each month
Even if they could, they would have to give the amount withheld to the IRS. That's not an option with our pension plan.
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Katietsu
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Re: Quarterly Tax Filing

Post by Katietsu »

chris319 wrote: Mon May 17, 2021 9:12 am
ask your pension payor to withhold 1/12 of that each month
Even if they could, they would have to give the amount withheld to the IRS. That's not an option with our pension plan.
I am not sure what you mean by withholding for the IRS not being an option. I do not think pension plans have a choice.

Estimated tax payments are a perfectly good option. But, there is a problem you might run into this year. You missed payment 1 and plan to skip payment 2. Your reasoning is that you will be having tax withheld from your paycheck for the first 5 months of the year. This is valid. However, you may need to file a Form 2210 next year and would need to complete the AI section. This is no fun for most people and most people would prefer to avoid this. Without this form, the IRS will default to spreading your W-2 withholding equally over all 4 quarters. The result is that you will have underpayed for quarters 1 and 2 if you do not annualized income.

Here is my suggestion. Wait until you get you last paycheck. Estimate the pension and social security payments that you expect for the remainder of 2021 and any other taxable income such as interest or capital gains. Use all this information to complete a dummy tax return. If you just have wages, social security and pension and you are not eligible for any significant special credits, you could even use something like TaxCaster to estimate potential tax liability. Figure out how your employer’s withholding matches up with your estimated tax liability. It may be that you do not need to make any quarterly payment if the withholding already meets the 90% of tax liability requirement. This can happen if the taxable part of your retirement income is less than your wages. But if you are going to need to pay the IRS to avoid a penalty, have the amount withheld from your pension. Just decide over how many months of pension you want the withholding done and make the math work out. This will all be less effort than the alternative.

In 2022, you can go back to a straightforward plan for 4 quarterly payments.
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Re: Quarterly Tax Filing

Post by dodecahedron »

chris319 wrote: Mon May 17, 2021 9:12 am The next quarterly "window" is June 1 - August 31. My retirement begins on May 31 in exactly 2 weeks. So it should be easy to figure my income for that quarter and make an estimated payment accordingly. I can then schedule a couple of payments into the future.
Payment to the IRS with a debit or credit card has fees.
Thank you; that's helpful to know.
On the other hand, folks like White Coat Investor have blogged about how they actually make a profit off using their cash-back credit cards to pay their estimated taxes because the credit card convenience charge can be less than the cash back rebate percentage.
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Re: Quarterly Tax Filing

Post by pshonore »

chris319 wrote: Mon May 17, 2021 9:12 am The next quarterly "window" is June 1 - August 31. My retirement begins on May 31 in exactly 2 weeks. So it should be easy to figure my income for that quarter and make an estimated payment accordingly. I can then schedule a couple of payments into the future.
Payment to the IRS with a debit or credit card has fees.
Thank you; that's helpful to know.
you could ask SS to withhold each month but the minimum is 7%. Skip all the fuss of estimated payments.
I'd be back to making an interest-free loan to the government.
ask your pension payor to withhold 1/12 of that each month
Even if they could, they would have to give the amount withheld to the IRS. That's not an option with our pension plan.
I find that hard to believe. In CT, withholding of pension and annuity payments is required unless the recipient files a form stating there is no tax liability or any tax due will be paid from other withholding. Supposedly, that's to prevent folks from owing more money that they realized. I think its because the State want their money ASAP.
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birdog
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Re: Quarterly Tax Filing

Post by birdog »

It took me too many years to figure out that if I used my 2.5% cash back visa to pay estimated quarterlies that after cc fees I still net a nice profit.
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Eagle33
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Re: Quarterly Tax Filing

Post by Eagle33 »

chris319 wrote: Mon May 17, 2021 9:12 am The next quarterly "window" is June 1 - August 31. My retirement begins on May 31 in exactly 2 weeks. So it should be easy to figure my income for that quarter and make an estimated payment accordingly. I can then schedule a couple of payments into the future.
The IRS has their own quarters. You should use theirs when figuring your income.
Jan - March
April - June
July - Sept
Oct - Dec


Careful of the odd deadline dates!

Edit: see correct "estimated tax quarters" below in Chip Munk response and on IRS website.
Last edited by Eagle33 on Wed May 19, 2021 12:05 am, edited 3 times in total.
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Chip Munk
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Re: Quarterly Tax Filing

Post by Chip Munk »

Eagle33 wrote: Mon May 17, 2021 8:55 pm
chris319 wrote: Mon May 17, 2021 9:12 am The next quarterly "window" is June 1 - August 31. My retirement begins on May 31 in exactly 2 weeks. So it should be easy to figure my income for that quarter and make an estimated payment accordingly. I can then schedule a couple of payments into the future.
The IRS has their own quarters. You should use theirs when figuring your income.
Jan - March
April - June
July - Sept
Oct - Dec

Careful of the odd deadline dates!
The OP is correct about the dates for the 3rd quarter being Jun 1 - Aug 31. The IRS's 2nd quarter is only 2 months long, the 4th quarter is 4 months long:
Q1: Jan 1 – Mar 31 Payment due: Apr 15
Q2: Apr 1 – May 31 Payment due: Jun 15
Q3: Jun 1 – Aug 31 Payment due: Sep 15
Q4: Sep 1 – Dec 31 Payment due: Jan 15 of the following year
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chris319
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Re: Quarterly Tax Filing

Post by chris319 »

TaxAct for TY 2020 has Form 1040-ES where I can enter the estimated tax payments I make on Sept. 15, 2021 and January 18, 2022. It also has Form 2210. Presumably, when I use TaxAct for TY 2021, it will import these estimated payments and enter them into 2210. I will look into the AI section of 2210. So aside from making the actual estimated payments, I will have to wait another year to deal with 2210 in my return for TY 2021. I'm going to let TaxAct do the heavy lifting.

Sound about right?

In a previous post I linked to a quarterly tax calculator which does both state and federal.
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MnD
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Re: Quarterly Tax Filing

Post by MnD »

I pay quarterly and have no withholding on my monthly pension or monthly portfolio withdrawals.
The main reason I do it is to control which account and what type of account the tax payments are made from for tax management.
For example in 2021 I am making 3 of 4 quarterly tax payments exclusively from accounts that do not generate taxable income when withdrawing funds. This will keep our AGI just under the threshold to receive the full 3rd stimulus payment when we file our 2021 tax return in the form of a tax credit.
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ExPatKiwi
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Re: Quarterly Tax Filing

Post by ExPatKiwi »

Interesting article here on how to use IRA withdrawal to get around quarterly tax filing need.

https://financialducksinarow.com/1663/i ... -payments/

A little-known fact about IRA distributions is that when you have taxes withheld from the distribution (which are then sent directly to the IRS), the withheld money is considered to have been received throughout the year – even if it is received late in December. Using this fact to your advantage, you could figure out how much your total estimated tax payments should be for the year sometime in early December, and then take a distribution from your IRA in that amount. Here’s the trick: Instead of taking the distribution yourself, fill out a form W-4P (or use your custodian’s form) to direct the total amount of the withdrawal to be withheld and sent to the IRS. Voila! You’ve now made even payments to the IRS for each of the four quarters, on time with no penalties!
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chris319
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Re: Quarterly Tax Filing

Post by chris319 »

In theory, could I pay the entire estimated tax ahead for the year, say in January, and have it count for the entire year? Then you don't have to worry about quarterly payments for the rest of the year, not that it would make much sense to do so. You'd really be making a generous interest-free loan to the government.
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Re: Quarterly Tax Filing

Post by dukeblue219 »

chris319 wrote: Tue May 18, 2021 9:47 am In theory, could I pay the entire estimated tax ahead for the year, say in January, and have it count for the entire year? Then you don't have to worry about quarterly payments for the rest of the year, not that it would make much sense to do so. You'd really be making a generous interest-free loan to the government.
Of course.

The IRS doesn't care about whether you made specific payments for specific due dates. They simply calculate the cumulative amount that was due by each deadline and charge you interest for the amount you were under. In this case, you won't have underpaid at any of those deadlines.

In the opposite scenario, a fast growing business might choose to not pay at all. There's no "penalty" in the sense of a fine or jail time, you just pay very low interest. If you pay the full amount at the 3rd quarter deadline, the interest would stop.
diy60
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Re: Quarterly Tax Filing

Post by diy60 »

ExPatKiwi wrote: Tue May 18, 2021 8:45 am Interesting article here on how to use IRA withdrawal to get around quarterly tax filing need.

https://financialducksinarow.com/1663/i ... -payments/

A little-known fact about IRA distributions is that when you have taxes withheld from the distribution (which are then sent directly to the IRS), the withheld money is considered to have been received throughout the year – even if it is received late in December. Using this fact to your advantage, you could figure out how much your total estimated tax payments should be for the year sometime in early December, and then take a distribution from your IRA in that amount. Here’s the trick: Instead of taking the distribution yourself, fill out a form W-4P (or use your custodian’s form) to direct the total amount of the withdrawal to be withheld and sent to the IRS. Voila! You’ve now made even payments to the IRS for each of the four quarters, on time with no penalties!
And if a Roth conversion is involved and if you have the funds in your taxable account, you could have the custodian withhold the full amount of taxes owed and repay the withheld taxes as an indirect rollover back into your Roth. Then you got the full advantage of both the taxes deemed withheld evenly and the taxes put back into the Roth, preserving the full conversion amount.
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