Estimated Tax Payments
Estimated Tax Payments
I've never had to pay estimated taxes in my life but now I'm retired. Currently taxes are being withheld from my pension so that is probably ok.
Sometime in the 4th QT I will probably make some Roth conversions which will require tax payments along with RMDs from an inherited IRA. So do I just wait until the 4th quarter and once I know how much I'm converting and withdrawing, send in a check to the IRS? Or do I need to be doing payments now even though I haven't withdrawn anything yet?
Thanks.
Sometime in the 4th QT I will probably make some Roth conversions which will require tax payments along with RMDs from an inherited IRA. So do I just wait until the 4th quarter and once I know how much I'm converting and withdrawing, send in a check to the IRS? Or do I need to be doing payments now even though I haven't withdrawn anything yet?
Thanks.
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Re: Estimated Tax Payments
Use the withdrawal from the inherited IRA to withhold all of the taxes required less what was withheld from the pension in order to meet your tax obligation for the year including the Roth conversions.
We withhold all taxes due for the year in December from an IRA. Withholding of taxes is considered timely withdrawal to the IRS and no estimated taxes are due.
Cheers
We withhold all taxes due for the year in December from an IRA. Withholding of taxes is considered timely withdrawal to the IRS and no estimated taxes are due.
Cheers
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Re: Estimated Tax Payments
No, you don't need to make payments in advance. But if you have made uneven tax payments because of uneven income, you will need to fill out Form 2210 to avoid late payment penalties. Some find this form onerous and confusing but it is not a really big deal. It is now too late to make even payments throughout this year in any case.rich126 wrote: ↑Fri May 19, 2023 3:09 pm I've never had to pay estimated taxes in my life but now I'm retired. Currently taxes are being withheld from my pension so that is probably ok.
Sometime in the 4th QT I will probably make some Roth conversions which will require tax payments along with RMDs from an inherited IRA. So do I just wait until the 4th quarter and once I know how much I'm converting and withdrawing, send in a check to the IRS? Or do I need to be doing payments now even though I haven't withdrawn anything yet?
Thanks.
If you withhold 90% of the tax due from the RMD, as suggested above, that is not considered late payment even if it is made late in the year. But of course if the RMD is insufficient to do that, this doesn't work.
Rather than sending a check to the IRS, you should make estimated tax payments electronically.
Re: Estimated Tax Payments
See the Safe harbors that will, if you meet any, preclude any interest or penalties when you file.
Re: Estimated Tax Payments
To pay the taxes on the conversions there are three methods:rich126 wrote: ↑Fri May 19, 2023 3:09 pm I've never had to pay estimated taxes in my life but now I'm retired. Currently taxes are being withheld from my pension so that is probably ok.
Sometime in the 4th QT I will probably make some Roth conversions which will require tax payments along with RMDs from an inherited IRA.
- Increase your withholding on your pension.
- Increase your withholding on the RMDs.
- Make estimated tax payments. (Since you've already missed the first payment you may have to file Form 2210.)
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Re: Estimated Tax Payments
I have made uneven estimated quarterly income tax payments, during 11 of the past 13 years. However, I have not needed to fill out Form 2210 to avoid underpayment penalties solely because the payments were uneven.Chuckles960 wrote: ↑Fri May 19, 2023 3:38 pm No, you don't need to make payments in advance. But if you have made uneven tax payments because of uneven income, you will need to fill out Form 2210 to avoid late payment penalties. Some find this form onerous and confusing but it is not a really big deal. It is now too late to make even payments throughout this year in any case.
I have included Form 2210 with its Schedule AI completed with the income tax returns for a few years to eliminate underpayment penalties. Based on my experience, Schedule AI of Form 2210 is a big enough deal to avoid. I have avoided it for the past 8 years by making timely payments based on the income tax for the previous year. I have done that even through it can result in paying more than necessary for the first three quarters.
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Re: Estimated Tax Payments
I also have been intimated by Form 2210 in the past although I've add to rarely use it. Can you please elaborate:FactualFran wrote: ↑Fri May 19, 2023 7:21 pmI have made uneven estimated quarterly income tax payments, during 11 of the past 13 years. However, I have not needed to fill out Form 2210 to avoid underpayment penalties solely because the payments were uneven.Chuckles960 wrote: ↑Fri May 19, 2023 3:38 pm No, you don't need to make payments in advance. But if you have made uneven tax payments because of uneven income, you will need to fill out Form 2210 to avoid late payment penalties. Some find this form onerous and confusing but it is not a really big deal. It is now too late to make even payments throughout this year in any case.
I have included Form 2210 with its Schedule AI completed with the income tax returns for a few years to eliminate underpayment penalties. Based on my experience, Schedule AI of Form 2210 is a big enough deal to avoid. I have avoided it for the past 8 years by making timely payments based on the income tax for the previous year. I have done that even through it can result in paying more than necessary for the first three quarters.
"I have avoided it for the past 8 years by making timely payments based on the income tax for the previous year. I have done that even through it can result in paying more than necessary for the first three quarters."
How does square with:
"I have made uneven estimated quarterly income tax payments, during 11 of the past 13 years."
It would seem that you're making timely payments based on the previous year--is that "safe harbor"? But if so, wouldn't those be even? How do you calculate uneven payments if based on the prior year?
Re: Estimated Tax Payments
See the Safe harbors that will, if you meet any, preclude any interest or penalties when you file:Artsdoctor wrote: ↑Fri May 19, 2023 7:36 pm How do you calculate uneven payments if based on the prior year?
If you make estimated tax payments instead of or in addition to withholding, and don't meet any of the safe harbors, no penalty is due if you meet safe harbor criteria #2 or #3 for each estimated tax "quarter". The payment deadlines for these "quarters" are normally April 15, June 15, September 15, and January 15 of the following year.[note 2]
The simplest method to test this is Part III of Form 2210, with both tax due and withholding assumed to have been 25% of the total each quarter, and estimated tax payments credited in the quarter paid.
Re: Estimated Tax Payments
This is a great idea. Does anyone know if the same rule applies for CA state income tax?Silk McCue wrote: ↑Fri May 19, 2023 3:18 pm Use the withdrawal from the inherited IRA to withhold all of the taxes required less what was withheld from the pension in order to meet your tax obligation for the year including the Roth conversions.
We withhold all taxes due for the year in December from an IRA. Withholding of taxes is considered timely withdrawal to the IRS and no estimated taxes are due.
Cheers
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Re: Estimated Tax Payments
The reason this issue is of more interest this year is that money market funds are paying almost 5%. So if any significant tax amounts are involved, one could save real money by not paying tax any earlier than necessary. Is that worth the hassle of Form 2210? I suppose any Boglehead would say yes.FactualFran wrote: ↑Fri May 19, 2023 7:21 pm... I have avoided it for the past 8 years by making timely payments based on the income tax for the previous year. I have done that even through it can result in paying more than necessary for the first three quarters.
Last edited by Chuckles960 on Fri May 19, 2023 9:46 pm, edited 1 time in total.
Re: Estimated Tax Payments
Based on a quick look, https://www.ftb.ca.gov/forms/2022/2022-5805.pdf appears similar to the federal Form 2210, with the exception of $500 instead of $1000 owed as one harbor, and special treatment for very high AGIs. See that to confirm you could do the same with CA withholding as with federal withholding.
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Re: Estimated Tax Payments
I don't know, but the federal W-2s and 1099s, which are typically accepted by states also, don't say when the tax was withheld, just how much was withheld. So there is no choice but to consider withholdings timely. I don't know if CA requires employers and payers to issue special forms that specify when the taxes were withheld.dual wrote: ↑Fri May 19, 2023 8:31 pmThis is a great idea. Does anyone know if the same rule applies for CA state income tax?Silk McCue wrote: ↑Fri May 19, 2023 3:18 pm Use the withdrawal from the inherited IRA to withhold all of the taxes required less what was withheld from the pension in order to meet your tax obligation for the year including the Roth conversions.
We withhold all taxes due for the year in December from an IRA. Withholding of taxes is considered timely withdrawal to the IRS and no estimated taxes are due.
Cheers
Re: Estimated Tax Payments
Contrary to several posts in this thread, uneven estimated tax payments do not by themselves trigger filling out form AI2210. Uneven estimated payments can be uneven and still considered timely. Consider the extreme example of paying your entire tax liability in Q1, and zero for the remaining quarters. Your payment would be both timely and sufficient and would not trigger filling out AI2210. This can be seen by looking at the default method. Uneven tax payments is commonly misunderstood.
Re: Estimated Tax Payments
.I don't know, but the federal W-2s and 1099s, which are typically accepted by states also, don't say when the tax was withheld, just how much was withheld. So there is no choice but to consider withholdings timely. I don't know if CA requires employers and payers to issue special forms that specify when the taxes were withheld
Good point. I am going to go for it. Worst that happens as I get hit with an underpayment penalty from CA. With all the shenanigans this year with delays in payments due to emergencies, they will probably be happy to get some money.
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Re: Estimated Tax Payments
The payments have not be even because I prefer to avoid having an overpayment or a large underpayment with the income tax return for the year, even if there would be no penalty with the large underpayment.Artsdoctor wrote: ↑Fri May 19, 2023 7:36 pm It would seem that you're making timely payments based on the previous year--is that "safe harbor"? But if so, wouldn't those be even? How do you calculate uneven payments if based on the prior year?
By the date when the estimated tax for the first quarter is due, I usually have a good estimate of the withholding that will be done for the year. I have make safe harbor payments, by estimated tax payments plus withholding, based on the income tax for the previous year for the first three quarters.
By the date when the estimated tax payment for the fourth quarter is due, I have a very accurate estimate of what the withholding and income tax for the year will be, although I don't have the final numbers that will be on the income tax return. That income tax estimate for the year is generally different from the sum of four quarters of equal estimated tax payment plus the withholding during the year.
If I made an estimated tax payment for the fourth quarter equal to the payment for the each of the first three quarters, then for the year I could have an overpayment or a large underpayment. Because I prefer to avoid either of those, for most years I have made an estimated tax payment for the fourth quarter that was not equal to the payment for each of the first three quarters.
There can a year, like the current one, when I did not have an accurate estimate of the withholding that will be done for the year by the date when the first estimated tax payment was due. The estimated tax payments for the second and third quarters will not be equal to the payment that was made for the first quarter. However, with the current year, there will almost certainly not be any underpayment penalties because timely payments will have been made for at least 90% of the income tax for the year.
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Re: Estimated Tax Payments
The way I understand it, you can still submit the April quarterly estimated tax. The penalty is based on the quarter if you don't meet the safe harbor rules. Penalty is 0.5% of the amount for each month or part of month that it is late and has a cap.Chuckles960 wrote: ↑Fri May 19, 2023 3:38 pmIt is now too late to make even payments throughout this year in any case.
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Re: Estimated Tax Payments
Thank you very much for the detailed explanation. I've copied this for future reference.FactualFran wrote: ↑Fri May 19, 2023 11:58 pmThe payments have not be even because I prefer to avoid having an overpayment or a large underpayment with the income tax return for the year, even if there would be no penalty with the large underpayment.Artsdoctor wrote: ↑Fri May 19, 2023 7:36 pm It would seem that you're making timely payments based on the previous year--is that "safe harbor"? But if so, wouldn't those be even? How do you calculate uneven payments if based on the prior year?
By the date when the estimated tax for the first quarter is due, I usually have a good estimate of the withholding that will be done for the year. I have make safe harbor payments, by estimated tax payments plus withholding, based on the income tax for the previous year for the first three quarters.
By the date when the estimated tax payment for the fourth quarter is due, I have a very accurate estimate of what the withholding and income tax for the year will be, although I don't have the final numbers that will be on the income tax return. That income tax estimate for the year is generally different from the sum of four quarters of equal estimated tax payment plus the withholding during the year.
If I made an estimated tax payment for the fourth quarter equal to the payment for the each of the first three quarters, then for the year I could have an overpayment or a large underpayment. Because I prefer to avoid either of those, for most years I have made an estimated tax payment for the fourth quarter that was not equal to the payment for each of the first three quarters.
There can a year, like the current one, when I did not have an accurate estimate of the withholding that will be done for the year by the date when the first estimated tax payment was due. The estimated tax payments for the second and third quarters will not be equal to the payment that was made for the first quarter. However, with the current year, there will almost certainly not be any underpayment penalties because timely payments will have been made for at least 90% of the income tax for the year.
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Re: Estimated Tax Payments
Here are some numbers. Here is an example of a year for which making the same safe harbor estimated tax payment for each quarter based on the income tax for the previous year would have resulted in a overpayment for the year.Artsdoctor wrote: ↑Sat May 20, 2023 9:59 am Thank you very much for the detailed explanation. I've copied this for future reference.
Code: Select all
Method Q1 Q2 Q3 Q4
Safe Harbor 28% 28% 28% 28%
Unequal Q4 28% 28% 28% 15%
Ann. Inc. 5% 0% 7% 88%
Here is an example of a year for which making the same safe harbor estimated tax payment for each quarter based on the income tax for the previous year would have resulted in an underpayment for the year but an underpayment for which there would not have been an underpayment penalty.
Code: Select all
Method Q1 Q2 Q3 Q4
Safe Harbor 24% 24% 24% 24%
Unequal Q4 24% 24% 24% 27%
Ann. Inc. 7% 1% 13% 80%
Re: Estimated Tax Payments
2210-AI (for annualizing income) can be onerous and confusing but 2210 itself for penalty calculation is pretty straightforward and as in most cases it used information the IRS already has (amount of withholding and dates and amounts of estimated payments0, the IRS asks you not to complete it unless one of the exceptions apply. If you don't complete it, the IRS calculates the penalty, if any, for you. Making unequal payments does not require that you annualize income.Chuckles960 wrote: ↑Fri May 19, 2023 3:38 pm No, you don't need to make payments in advance. But if you have made uneven tax payments because of uneven income, you will need to fill out Form 2210 to avoid late payment penalties. Some find this form onerous and confusing but it is not a really big deal. It is now too late to make even payments throughout this year in any case.
Re: Estimated Tax Payments
Thanks. See my comment above.FiveK wrote: ↑Fri May 19, 2023 9:35 pmBased on a quick look, https://www.ftb.ca.gov/forms/2022/2022-5805.pdf appears similar to the federal Form 2210, with the exception of $500 instead of $1000 owed as one harbor, and special treatment for very high AGIs. See that to confirm you could do the same with CA withholding as with federal withholding.
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Re: Estimated Tax Payments
If you do your own taxes, I suggest creating an estimated return for 2023 using TY 2022 software. Play around with estimated and withheld taxes and check the penalties and interest.