Estimated Quarterly Tax Payments

[littleb]

So, 2018 is the first full year of FIRE and I need to understand how to pay estimated tax payments to the IRS.

Currently for 2018 we are covered under the ACA with an estimated AGI
of 31,000. Our premium under the ACA is 0 due to the low income.

Current Income Breakdown for 2018:

Interest - 6,420 (estimate)
Dividends - 5,140 (estimate)
Capital Gains - 10,677 (actual as of today)
No other income sources

TOTAL INCOME 22,237.00

Married filing jointly - New Tax Law allows 24,000 deduction (No other deductions)

As of today we have about 8,000 available to stay under the required 31,000 income for the ACA.

My understanding is if I sell equities for a capital gain of 8,000 our tax bill will be 0. If I pull the 8,000 out of a tax deferred account is our tax bill also 0?

Are both options correct where I would not pay Estimated Tax Payments for 2018?

 

[pb4uski]

Correct... as long as your ordinary income* is less than $24,000 and your total income is $31,000 then your tax bill will be zero and no need to pay federal estimated tax payments... if you live in a state with an income tax you may need to make state estimated payments.

Qualified dividends and long-term capital gains are 0% if total taxable income for MFJ is under $77,200 in 2018.

* interest, non-qualified dividends, short-term capital gains and tax-deferred withdrawals in your case

 

[marko]

FWIW, I'm supposed to, but never do pay estimateds. I pay the fine and keep it simple.

 

[W2R]

FWIW, I'm supposed to, but never do pay estimateds. I pay the fine and keep it simple.

Can you do that? Don't you get in trouble with the IRS or something? I hope you don't end up in jail for tax evasion or some such thing. Bear in mind that I know absolutely zero about whether this is legal or not.

 

[marko]

Can you do that? Don't you get in trouble with the IRS or something? I hope you don't end up in jail for tax evasion or some such thing. Bear in mind that I know absolutely zero about whether this is legal or not.

AFAIK as long as I pay the modest fine it's ok. The estimateds are not a lot of money as most of my taxes are paid when I withdraw from my IRA. My fine is about $300.

Then again, maybe that's why I've been getting those phone calls from the IRS saying that the police are on their way to arrest me unless I give them my credit card number.

 

[littleb]

Correct... as long as your ordinary income* is less than $24,000 and your total income is $31,000 then your tax bill will be zero and no need to pay federal estimated tax payments... if you live in a state with an income tax you may need to make state estimated payments.

Qualified dividends and long-term capital gains are 0% if total taxable income for MFJ is under $77,200 in 2018.

* interest, non-qualified dividends, short-term capital gains and tax-deferred withdrawals in your case

Thanks!

 

[pb4uski]

Can you do that? Don't you get in trouble with the IRS or something? I hope you don't end up in jail for tax evasion or some such thing. Bear in mind that I know absolutely zero about whether this is legal or not.

Totally legal... you just need to pay underpayment penalties and interest.

Now failure to file is a whole different kettle of fish.

 

[gauss]

FWIW, I'm supposed to, but never do pay estimateds. I pay the fine and keep it simple.

+1 I always use to worry about the underwithholding penalties -- later in life I realized that it is fairly benign. (2% I think). Not worth loosing too much sleep over.

I do however, always seem to have at least 100% of last years tax withheld via w2 and/or 1099 so I am always clear of any penalty due to the safe harbor rules that apply. (IE. no underwithholding penalty if 100% of prior years tax is withheld via w2 or 1099).

-gauss

 

[travelover]

AFAIK as long as I pay the modest fine it's ok. The estimateds are not a lot of money as most of my taxes are paid when I withdraw from my IRA. My fine is about $300..........

That seems like a waste of money. Why not over-withhold a little or do a quick calculation before the end of the year and make up the difference? As long as you withhold your previous year's tax amount you are held harmless.

 

[gauss]

That seems like a waste of money. Why not over-withhold a little or do a quick calculation before the end of the year and make up the difference? As long as you withhold your previous year's tax amount you are held harmless.

IF OP doesn't have options of 1099 or w2 withholding available, it is not so simple. If estimated payments are ever sent in, then every quarter needs to be tested individually to see if an underwitholding penalty occurs.

Said differently, you can't just wait until December and send in 1 1040-ES payment for the entire prior years tax. (But you prorbably could do this in the beginning of the year if your cash flow would support it). 1099/w2 withholding on the other hand, as Travelover suggests, can be all sent in at the last minute.

-gauss

 

[travelover]

IF OP doesn't have options of 1099 or w2 withholding available, it is not so simple. If estimated payments are ever sent in, then every quarter needs to be tested individually to see if an underwitholding penalty occurs.

Said differently, you can't just wait until December and send in 1 1040-ES payment for the entire prior years tax. (But you prorbably could do this in the beginning of the year if your cash flow would support it). 1099/w2 withholding on the other hand, as Travelover suggests, can be all sent in at the last minute.

-gauss

Can't you pull the under withheld difference from an IRA, have 100% withholding, then "rollover" that same amount to the same IRA within 60 days?

 

[gauss]

Can't you pull the under withheld difference from an IRA, have 100% withholding, then "rollover" that same amount to the same IRA within 60 days?

In general yes -- assuming your IRA custodian allows withholding. IRA withdrawals are reported on 1099-Rs and this is a useful technique.

The problem creeps in when 1040-ES (estimated payments) are sent in directly to the IRS from the taxpayer. In this case things get more complicated.

OP was originally asking about 1040-ES quarterly tax payments if I recall correctly. If he has 1099 withholding available such as via an IRA then this may be a simpler method (especially if 1099-R withholding can be cranked up to near 100% of the distribution).

-gauss

 

[RunningBum]

Yes, if you're not going to owe any tax, you don't need to make estimated payments. I didn't verify your numbers but it certainly looks right.

Furthermore, if you don't owe tax this year, you don't have to make estimated payments next year either, or so I've been told.

Watch out for state taxes though, if they apply to you.

As of today we have about 8,000 available to stay under the required 31,000 income for the ACA.

OK, not your question, but this looks odd/wrong. 100% FPL for a couple in 2018 is $16240. The important cutoffs are 400% FPL, to get a subsidy at all. 250% FPL to get cost sharing benefits. 138% FPL, below which you'd be on medicaid, depending on state. I don't fully understand the last number but my understanding is you want to stay above it.

$31000 is 191% FPL, so I'm wondering what's "required" about that?

 

[RunningBum]

FWIW, I'm supposed to, but never do pay estimateds. I pay the fine and keep it simple.

IMO paying estimated taxes is very simple. If you have pretty consistent taxes year to year, just schedule 25% payments each quarter based on the previous year. If it's uneven, it takes more work the year after a high income year (because you don't want to withhold more than you have to in the lower income year), but it doesn't take that much work. Many of us already estimate income to control cap gains or Roth conversions to keep the subsidy or stay within a certain tax bracket, so it's only a little more work to estimate taxes. If you don't want to do it, that's fine, but don't make it sounds like it's complicated.

 

[audreyh1]

We don’t have have any withholding.

I use eftps.gov - the Electronic Tax Playment System which draws payments that I schedule from a linked bank account.

Last year I scheduled all four estimated tax payments based on the prior years taxes x 1.1 and divided by 4. Boy that was easy!

This year our taxable income is expected to drop considerably so I’ll be doing annualized income estimates for each quarter as we receive income. A bit more complex.

 

[kaneohe]

Can't you pull the under withheld difference from an IRA, have 100% withholding, then "rollover" that same amount to the same IRA within 60 days?

You'll have to keep good records and it might difficult to pull off yr after yr.
You can only do the rollover once every12 mos.

 

[travelover]

You'll have to keep good records and it might difficult to pull off yr after yr.
You can only do the rollover once every12 mos.

Vanguard or whomever keeps the records and issues the tax documents. And you only need to do it once a year.

 

[kaneohe]

................................. And you only need to do it once a year.

I would avoid describing it as once a yr.......which gives the impression of once per calendar yr. It would also be good to avoid doing it too late in the yr because, unless you are very disciplined, you may be very soon be forced to skip a yr.

 

[gauss]

Can't you pull the under withheld difference from an IRA, have 100% withholding, then "rollover" that same amount to the same IRA within 60 days?

Intriguing strategy that I have not thought of before.

You aren't really doing a withdrawal at the end of the day because you are rolling over the funds back into the same IRA with other after tax funds.

You are still able to benefit from the 1099 withholding.

With the 60-day regulations that went into effect a few years ago, as pointed out, this would be limited to once every 12 months or so.

This seems to be a useful tool that everyone could take advantage of as long as the IRA custodian allows high levels of withholding.

Bravo and thanks for sharing.

-gauss
p.s. I think that I have done 401k withholding in the past when I needed to do this sort of thing, but your idea seems less restrictive.

 

[gauss]

I would avoid describing it as once a yr.......which gives the impression of once per calendar yr. .

Understood -- you need to respect the new regulations from a few years ago limiting the frequency of 60-day IRA indirect rollovers.

It would also be good to avoid doing it too late in the yr because, unless you are very disciplined, you may be very soon be forced to skip a yr.

Okay - it may be late in the day, or I may be dense, but I am not seeing what you are getting at in this part. Could you please elaborate, kaneohe?

edit: Are you suggesting that the IRA custodian may not process this timely in the current calendar year? I definitely ran into a scare with this regarding a Roth conversion last year.

Thanks
-gauss

 

[travelover]

Intriguing strategy that I have not thought of before.

You aren't really doing a withdrawal at the end of the day because you are rolling over the funds back into the same IRA with other after tax funds.

You are still able to benefit from the 1099 withholding.

With the 60-day regulations that went into effect a few years ago, as pointed out, this would be limited to once every 12 months or so.

This seems to be a useful tool that everyone could take advantage of as long as the IRA custodian allows high levels of withholding.

Bravo and thanks for sharing.

-gauss
p.s. I think that I have done 401k withholding in the past when I needed to do this sort of thing, but your idea seems less restrictive.

I can't take credit for this. I think it was pb4uski that suggested it when I was scrambling to buy my house for cash.

 

[pb4uski]

I wonder if it was someone else because I have had trouble following the thread.

 

[jazz4cash]

I wonder if it was someone else because I have had trouble following the thread.

Coulda been me. I got the idea from ed slotts website. He had an example of someone having a perpetual rollover before the once/12 mo rule took effect.

 

[travelover]

Coulda been me. I got the idea from ed slotts website. He had an example of someone having a perpetual rollover before the once/12 mo rule took effect.

Coulda been. I’m too lazy to look it up. Thanks to whoever suggested it.

 

[gauss]

Indeed! Thanks to all.