Can someone explain estimated taxes in retirement?

[LXEX55]

I am not yet retired. I was under the impression that we only had to meet one tax deadline per year. Am I wrong? Can someone please explain the basics of estimated taxes in retirement?

 

[W2R]

Here you go:

https://www.irs.gov/newsroom/estimated-taxes-for-individuals

Basically, the IRS wants some money throughout the year even if you don't have tax money withheld. Most of us pay estimated taxes in April, June, September, and January.

 

[Crabby Mike]

Short answer -- the government (both Federal and your state, if it has income tax) wants your taxes paid over the course of the year, not just all at once the following April. When you are w*rking, most people pay via payroll deduction, and then either owe or get a refund when you file. Once you retire, you need to find another way to pay over the course of the year, either via quarterly estimated payments, or by having some income withheld from Social Security, pensions, etc.


Quarterlies aren't that hard -- essentially you pay 1/4 of your taxes by April 15, June 15, September 15, and January 15 (of the next year), then settle up by April 15. There are other nuances (if income doesn't come ratably during the year, etc.), but that's the gist of it.

 

[audreyh1]

I am not yet retired. I was under the impression that we only had to meet one tax deadline per year. Am I wrong? Can someone please explain the basics of estimated taxes in retirement?

You do have to pay taxes ahead (unless your tax liability will be under $1000), and you can do this by tax withholding from pension payments and/or IRA withdrawals. You need to pay at least the prior year's taxes (or 1.1x the prior years taxes if the income was over $150K MFJ) or 90% of the current year's taxes. These are the "safe harbor" rules.

If you cannot cover the full estimated taxes via tax withholding during the year, then you need to make estimated tax payments to meet the safe harbor rules. These payments are due at four different times during the year: April 15, May 15, Sept 15, and Jan 15 of the following year.

You can either make these estimated tax payments in four equal installments, or use an Annualized Income method based on how much income you have received by March 31, April 30, August 31, and Dec 31. The Annualized Income method is quite a bit more complex.

Most folks either make sure that their tax withholding from pension/SS income and IRA withdrawals are sufficient to meet the estimated tax safe harbor rules by the end of the year, or they pay four quarterly installments at the due dates based on the prior year's taxes. (or a combination).

So you see - it's not that simple, but there are safe harbor rules to protect you from penalty in case of not being able to predict income. There is also an Annualized Income method for estimated taxes if you prefer to compute based on each "quarters" income. Note that the quarters for estimated tax purposes are not even 3 month periods.

W2R's link will get you to Publication 505 that goes over all the gritty details.

 

[OldShooter]

Our situation is blessedly simple: All our assets are in IRAs or Roths. Late in every year we figure our "safe harbor" estimated tax payment, which is based on our prior year taxes. Then we withdraw from the IRAs that amount and have 100% withheld. That year-end payment, since it is withholding, is considered by the IRS to have been paid during the year so we are at no risk for not making quarterly estimated tax payments.

If we are invested and the market goes up during the year, we profit on the government's money. If someone does not want to take this risk, just sell equities earlier and put the money into t-bills, CDs, MMF, etc inside the IRAs until it is withdrawn at the end of the year. Then you make less money on the government's money but it is less risky.

 

[Souschef]

Another method is to log in to EFTPS for the feds, and set up quarterly payments out of your checking account. I also do the same for state estimated.
Just be sure you have enought in the account.

 

[audreyh1]

I pay quarterly estimated taxes, as I don’t have any pension or IRA income to set up tax withholding.

Most years I use the 110% of the prior year taxes, and pay estimated taxes in four quarterly installments on the due dates. This means no penalty even if taxes are quite a bit higher for the current year.

If, however, I know my income will drop significantly for the current year, I use the annualized income method for estimated taxes. This method also avoid penalty, but requires a lot more computation.

I also use eftps.gov to pay taxes. I have it linked to one of my high yield savings accounts.

 

[Cobra9777]

We have two pensions but elected to have no withholding. Our tax return is just now starting to stabilize after retiring 5 years ago. First two years, I still had employee stock option exercises. Last year, we sold a rental house which generated large gains. Plus we have Roth conversions every December in amounts that swing around depending on other taxable events. So our quarterly payments require quite a bit of calculation and planning in Excel and TurboTax, including the annualized income method. Goal is to avoid underwithholding penalties, but also to keep money in our accounts as long as possible.

This year forward should be more stable and I should be able to convert to something much simpler, like 110% of last year's tax divided by 4; or possibly even withholding from the pensions. Although part of me just likes the game of paying the IRS the least possible amount at the last possible minute.

We use the newer IRS Direct Pay system.

 

[HFWR]

My SS, IRA, and pension all provide the option of having taxes withheld, so I do that, to avoid fiddling with IRS any more than necessary. There is some minor opportunity cost, worth it to me.

 

[kaneohe]

https://fairmark.com/general-taxation/estimated-tax/estimated-tax-101/

your homework above..........

 

[TwoByFour]

I am not yet retired. I was under the impression that we only had to meet one tax deadline per year. Am I wrong? Can someone please explain the basics of estimated taxes in retirement?

The federal government is worried about mental decline with the elderly so they come up with these little brain teasers for us all to solve every year. It is ostensibly about taxes but it is really to keep their Medicare costs down by stimulating our aging brains.

Actually it is pretty simple, takes maybe 30 minutes to calculate and set up EFTPS every year. Basically, they want quarterly payments from most of us.

 

[braumeister]

The federal government is worried about mental decline with the elderly so they come up with these little brain teasers for us all to solve every year. It is ostensibly about taxes but it is really to keep their Medicare costs down by stimulating our aging brains.

Thanks, that was my morning chuckle.

 

[marko]

Our plan is quite simple. My accountant gives me printouts in April of what I'm supposed to pay in estimateds and we throw them away.

While we're supposed to, we don't pay estimates and just pay the penalty at tax time.

 

[Lukeee]

Our plan is quite simple. My accountant gives me printouts in April of what I'm supposed to pay in estimateds and we throw them away.

While we're supposed to, we don't pay estimates and just pay the penalty at tax time.

Lol. You should negotiate a 10% discount with your accountant and tell him not to send you the estimates.

 

[CardsFan]

Our plan is quite simple. My accountant gives me printouts in April of what I'm supposed to pay in estimateds and we throw them away.

While we're supposed to, we don't pay estimates and just pay the penalty at tax time.

Out of curiosity, how large is the penalty, as percent of taxes owed?

 

[marko]

Out of curiosity, how large is the penalty, as percent of taxes owed?

Well we do pay upfront withholdings on our IRA withdrawals so it's just a couple hundred bucks penalty. I don't know the percentage.

 

[happy2bretired]

Our plan is quite simple. My accountant gives me printouts in April of what I'm supposed to pay in estimateds and we throw them away.

While we're supposed to, we don't pay estimates and just pay the penalty at tax time.

I do just the opposite. I pay in advance (over pay). I know, I’m losing some money but hey I’m patriotic and lend a little every year to Uncle. [emoji23] Works for me.

 

[audreyh1]

Well we do pay upfront withholdings on our IRA withdrawals so it's just a couple hundred bucks penalty. I don't know the percentage.

Well then, you are paying estimated taxes via withholding. It’s the “error” that is small enough that the penalty does not bother you.

 

[Independent]

Our situation is blessedly simple: All our assets are in IRAs or Roths. Late in every year we figure our "safe harbor" estimated tax payment, which is based on our prior year taxes. Then we withdraw from the IRAs that amount and have 100% withheld. That year-end payment, since it is withholding, is considered by the IRS to have been paid during the year so we are at no risk for not making quarterly estimated tax payments.

This works for me, too.

 

[jazz4cash]

Well we do pay upfront withholdings on our IRA withdrawals so it's just a couple hundred bucks penalty. I don't know the percentage.

"just a couple hundred bucks penalty"....YIKES. That's not really the penalty for not paying estimated is it? There are members on this board that would KILL for free Turbotax and here you are throwing a couple hundred bucks away on penalties? Naw, can't be true.

 

[Jerry1]

Late in every year we figure our "safe harbor" estimated tax payment, which is based on our prior year taxes. Then we withdraw from the IRAs that amount and have 100% withheld. That year-end payment, since it is withholding, is considered by the IRS to have been paid during the year so we are at no risk for not making quarterly estimated tax payments.

Next year will be my first tax year where this is necessary, but this ^^ is what I plan on doing. I will prolly combine that with safe harbor so I don’t have to actually figure out my taxes. I’ll just make a one time, late in the year withholding equal to 100% of last years taxes, since I don’t expect to ever be over $150K in retirement.

 

[TrvlBug]

Our situation is blessedly simple: All our assets are in IRAs or Roths. Late in every year we figure our "safe harbor" estimated tax payment, which is based on our prior year taxes. Then we withdraw from the IRAs that amount and have 100% withheld. That year-end payment, since it is withholding, is considered by the IRS to have been paid during the year so we are at no risk for not making quarterly estimated tax payments.

If we are invested and the market goes up during the year, we profit on the government's money. If someone does not want to take this risk, just sell equities earlier and put the money into t-bills, CDs, MMF, etc inside the IRAs until it is withdrawn at the end of the year. Then you make less money on the government's money but it is less risky.

Does this also apply if you have other income such as SS and K-1, although most of our income is from RMD and annuitized IRA. We pay estimated taxes, but it would be so much easier to pull the safe harbor amount from our November RMD withdrawal.

 

[audreyh1]

Does this also apply if you have other income such as SS and K-1, although most of our income is from RMD and annuitized IRA. We pay estimated taxes, but it would be so much easier to pull the safe harbor amount from our November RMD withdrawal.

As long as your minimums - last year's taxes (times 110% if applicable), or 90% of current year's taxes - are covered by the withholding from the RMD, it doesn't matter where your income is coming from.

 

[marko]

"just a couple hundred bucks penalty"....YIKES. That's not really the penalty for not paying estimated is it? There are members on this board that would KILL for free Turbotax and here you are throwing a couple hundred bucks away on penalties? Naw, can't be true.

There's another thread here named "What's your splurge?". That must me mine. It's about $250 a year. I just really can't be bothered and hate thinking about income taxes except once a year.

 

[sengsational]

That year-end payment, since it is withholding, is considered by the IRS to have been paid during the year so we are at no risk for not making quarterly estimated tax payments.

Like OS, I don't do quarterlies...one less "account" that I'd feel compelled to track if I did pay quarterly. Instead, I "do my taxes" in November/December and in my case, I can get very close to my final tax return. I pull enough after-tax funds to last me through the upcoming year and I set the withholding such that it slightly exceeds what I will owe. This allows me to make sure I'm getting the expected PTC too, without getting near the cliff. There was a case a few years ago where the plan administrator forced a high withholding rate on me, so nothing I could do there but file early and get the big refund ASAP. But last year, everything went according to plan.


You have to do your taxes sooner or later. Why wait for stuff to show up in the mail? If you think about it, almost everything can be estimated very closely before the end of the year. Get all of those estimates in there and then twiddle the tIRA withdrawals and/or Roth conversions until you get where you want. Set the withholding for state and federal, do your pulls, then put it all away until February or April or whenever, when you key the actual values and submit.