Estimated Tax Payments

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rich126
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Estimated Tax Payments

Post by rich126 »

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 Or do I need to be doing payments now even though I haven't withdrawn anything yet?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.
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Silk McCue
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Re: Estimated Tax Payments

Post by Silk McCue »

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
Chuckles960
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Re: Estimated Tax Payments

Post by Chuckles960 »

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 Or do I need to be doing payments now even though I haven't withdrawn anything yet?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.
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.

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.
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FiveK
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Re: Estimated Tax Payments

Post by FiveK »

See the Safe harbors that will, if you meet any, preclude any interest or penalties when you file.
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Duckie
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Re: Estimated Tax Payments

Post by Duckie »

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.
To pay the taxes on the conversions there are three methods:
  1. Increase your withholding on your pension.
  2. Increase your withholding on the RMDs.
  3. Make estimated tax payments. (Since you've already missed the first payment you may have to file Form 2210.)
Since I have no RMDs, I withhold extra from my pension to cover the taxes on my dividends. That way I don't have to deal with estimated payments which have due dates.
FactualFran
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Re: Estimated Tax Payments

Post by FactualFran »

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 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.

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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Artsdoctor
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Re: Estimated Tax Payments

Post by Artsdoctor »

FactualFran wrote: Fri May 19, 2023 7:21 pm
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 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.

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 also have been intimated by Form 2210 in the past although I've add to rarely use it. Can you please elaborate:

"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?
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FiveK
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Re: Estimated Tax Payments

Post by FiveK »

Artsdoctor wrote: Fri May 19, 2023 7:36 pm How do you calculate uneven payments if based on the prior year?
See the Safe harbors that will, if you meet any, preclude any interest or penalties when you file:
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.
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dual
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Re: Estimated Tax Payments

Post by dual »

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
This is a great idea. Does anyone know if the same rule applies for CA state income tax?
Chuckles960
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Re: Estimated Tax Payments

Post by Chuckles960 »

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.
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.
Last edited by Chuckles960 on Fri May 19, 2023 9:46 pm, edited 1 time in total.
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FiveK
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Re: Estimated Tax Payments

Post by FiveK »

dual wrote: Fri May 19, 2023 8:31 pm This is a great idea. Does anyone know if the same rule applies for CA state income tax?
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.
Chuckles960
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Re: Estimated Tax Payments

Post by Chuckles960 »

dual wrote: Fri May 19, 2023 8:31 pm
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
This is a great idea. Does anyone know if the same rule applies for CA state income tax?
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.
diy60
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Re: Estimated Tax Payments

Post by diy60 »

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.
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dual
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Re: Estimated Tax Payments

Post by dual »

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.
FactualFran
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Re: Estimated Tax Payments

Post by FactualFran »

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?
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.

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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CyclingDuo
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Re: Estimated Tax Payments

Post by CyclingDuo »

Chuckles960 wrote: Fri May 19, 2023 3:38 pmIt is now too late to make even payments throughout this year in any case.
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.

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Artsdoctor
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Re: Estimated Tax Payments

Post by Artsdoctor »

FactualFran wrote: Fri May 19, 2023 11:58 pm
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?
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.

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.
Thank you very much for the detailed explanation. I've copied this for future reference.
FactualFran
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Re: Estimated Tax Payments

Post by FactualFran »

Artsdoctor wrote: Sat May 20, 2023 9:59 am Thank you very much for the detailed explanation. I've copied this for future reference.
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.

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%
The percentages are the estimated income tax for the year that plus the withholding is equal to the tax for the year. Although the standard Annualized Income method pays 90% of the tax through each quarter, with the rest due with the return, paying 100% is used here.

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%
lstone19
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Re: Estimated Tax Payments

Post by lstone19 »

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.
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.
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dual
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Re: Estimated Tax Payments

Post by dual »

FiveK wrote: Fri May 19, 2023 9:35 pm
dual wrote: Fri May 19, 2023 8:31 pm This is a great idea. Does anyone know if the same rule applies for CA state income tax?
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.
Thanks. See my comment above.
SpideyIndexer
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Re: Estimated Tax Payments

Post by SpideyIndexer »

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.
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