Estimated Tax - When do you usually make the fourth payment of the year?

[Disappointed]

This is my first year of retirement and I am trying to figure out when and how much to pay on my fourth Federal and State taxes?

I think I have underpaid my Federal and California taxes so far.

Should I make another payment before the end of the year (instead of waiting till April 15th 2015)? I am trying to avoid the any penalty for under paying (withholding for those that are still working)

How close should/must I be in estimating my 2014 income? It is kind of hard to be precise in estimating dividend and capital gain before the end of the year.

Thanks,

mP

 

[target2019]

1st payment
April 15, 2014

2nd payment
June 16, 2014

3rd payment.
Sept. 15, 2014

4th payment
Jan. 15, 2015

So, you don't wait until April 15, 2015. That is when you make the first estimated payment for the next year.

 

[RunningBum]

First, you almost certainly have to make a payment by Jan 15. April 15 is when you can resolve small shortages, but it can't be much unless you owe a lot more in taxes in the current year than the previous year.

You can't just make up the shortage on the last payment. If you pay less than 1/4 of 90% of what you owe (or 100% of last year's tax, 110% for high earners) in the early quarters, you will get hit with an underpayment penalty and interest, unless you show income coming late in the year, or deductions early.

So if you make $100K this year, about $25K each quarter, and owe $12K in taxes, you need to have paid at least $2.7K (90% of $12K/4) each quarter.

But if you made $5K in the first three quarters and $85K in the 4th quarter, there is some form you fill out to show which quarter you received your income and paid your deductions that will allow you to pay less early and more later. You'd still need to make a big payment by Jan 15.

Fairmark is a great resource for tax questions. I've found it to be very accurate, and easy to follow.
Guide to Estimated Taxes

 

[scrabbler1]

The 4th payment of estimated state income taxes can also be used as a method to "bunch" one's itemized deductions. For example, you could make your 4th quarter 2014 estimated state income taxes in early January of 2015, then make the 4th quarter 2015 estimated state income taxes in December of 2015, thereby paying more state income taxes in 2015 than in 2014 (or 2016, if you repeat the process in 2017). If you are near the Standard Deduction amount, you can take the SD in the years you don't make the extra estimated tax payment. You may also try to coordinate the bunching with other discretionary itemized deductions such as charitable deductions and perhaps early payments of annual property tax payments.

 

[Disappointed]

Hi RunningBum:

Do you need to include your capital gain in your income estimate every quarter? What if you have gain in the first quarter but a loss in the second quarter?

I will visit Fairmark site and read up, thanks for the link.

 

[jarts98]

The 4th payment of estimated state income taxes can also be used as a method to "bunch" one's itemized deductions. For example, you could make your 4th quarter 2014 estimated state income taxes in early January of 2015, then make the 4th quarter 2015 estimated state income taxes in December of 2015, thereby paying more state income taxes in 2015 than in 2014 (or 2016, if you repeat the process in 2017). If you are near the Standard Deduction amount, you can take the SD in the years you don't make the extra estimated tax payment. You may also try to coordinate the bunching with other discretionary itemized deductions such as charitable deductions and perhaps early payments of annual property tax payments.

Scrabbler beat me to this point.....just be careful of possible AMT issues.

 

[RunningBum]

Hi RunningBum:

Do you need to include your capital gain in your income estimate every quarter? What if you have gain in the first quarter but a loss in the second quarter?

I will visit Fairmark site and read up, thanks for the link.

Yes, you do include capital gains unless your income is low enough that they won't be taxed. If you have a loss in the second quarter you would carry it over to the third quarter if you don't have any other income in the second quarter to offset.

I used to try to estimate actual income and deductions each quarter, partly because the biggest distributions in mutual funds come in December, so that's when the most income comes. Then I started doing the bulk of my Roth conversion early in the year so it worked out just about as well to do even payments. I can schedule all four payments at the start of the year so I won't forget them, and I don't have to deal with accounting for my income and deductions each quarter to avoid the penalty. It's not that hard to do if it's worthwhile to you, and your estimated payments don't have to be exact. I would usually round up my payments just to make sure.

 

[Disappointed]

Wow, did not realize that I need to include capital gains in each quarter estimate, I am definitely under paid by quite a bit. I received a big chunk of pay as a consultation fee in January but did not realize that my estimated tax payment of the first quarter needed to be based on that payment. I just tried to estimate my income for the year and estimated my taxes from that amount then divide the estimated tax liabilities by four and made payments of equal amount each quarter.

Obviously I should have consulted with an accountant at the beginning of the year as this is my first year of retirement but I didn't.

I need to talk to an accountant.

 

[jarts98]

Don't forget, too, that there are safe harbor rules (to avoid penalties). In general, if you make estimates equal to (or higher than) last years total tax owed, you will avoid a penalty for underpayment in the current year. As always (it seems) with taxes, there are exceptions to the rule (ie, high income tax payers). As you mentioned, get with a CPA to discuss.

Your state rules may be different......so again, talk to a local CPA.

 

[wingfooted]

I have a high capital gain component to my tax filings and of course it is nearly impossible to gauge the magnitude until year end.

So I try and fund a 'base level' in quarters one to three and catch up on the 15 January payment. The IRS does levy some penalties and interest but the amount is less than 1% of the total tax due.


Sent from my iPad using Early Retirement Forum

 

[RunningBum]

As I tried to say early, equal payments are ok if your 4th payment by Jan 15 gets you to 90%. I'm assuming since you were working last year, you aren't paying as much in taxes as you did last year but 100% or 110% of that (depending on your income) would be safe as well. But a larger 4th payment won't avoid the penalty (though I think the earlier you try to make up the difference the better).

It probably sounds worse than it is. Presumably you've had that money invested, and this has been a good year, so you might have made more than you'll owe in penalties and interest.

 

[Peter]

You can't just make up the shortage on the last payment. If you pay less than 1/4 of 90% of what you owe (or 100% of last year's tax, 110% for high earners) in the early quarters, you will get hit with an underpayment penalty and interest, unless you show income coming late in the year, or deductions early.

That may well be the official position. However, for many years now, I have made up any shortage in the final payment, and no penalty has been due, according to TurboTax.

I've paid penalties as a result of late quarterly payments, but never because of making up earlier underpayments in the fourth quarter.

 

[scrabbler1]

Remember that the 4 "quarters" are not actually equal in length, as in 3 months, 3 months, 3 months, and 3 months. Instead, they are 3, 2, 3, and 4 months. Combine that with the fact that many mutual funds don't make their big annual payouts until December and it is likely that you will have a lot more than 25% of your investment income (and, if you work, bonus income perhaps) in that final "quarter." I have so little of my taxable investment income percentage-wise, even from monthly bond fund dividends, in the first 5 months of the year that I don't even bother with estimated income tax payments until the 3rd or 4th quarter. (Not that I recommend that to everyone else.)

 

[sengsational]

OT, but related...So this would be a first year of retirement scenario....

I worked a month (with withholding) and quit. I will get a bit of dividend and interest income, and will have a Roth conversion, but income will be much lower than when I was working.

When I put the expected values into last year's tax software, it comes out that they owe me money. Any worry that I'll have penalties for not doing estimated taxes?

 

[heyyou]

This is a recent conversation on the same topic at a different forum that tells how to use withholding to clean up late payment of the quarterly estimated taxes that were due during the year. Do look up the cost of the interest on the late payments, as one poster suggested that the late interest due was $11. Might be better to pay tax + back interest from taxable accounts than to WD a few thousand from an IRA to avoid the extra interest.

Bogleheads • View topic - Do I need to send in estimated tax?

 

[RunningBum]

That may well be the official position. However, for many years now, I have made up any shortage in the final payment, and no penalty has been due, according to TurboTax.

I've paid penalties as a result of late quarterly payments, but never because of making up earlier underpayments in the fourth quarter.

The last year I did uneven estimated payments (lower early and higher payments later), Turbo Tax told me how much I'd have to pay in penalty and interest, but gave me the option to fill out form 2210 to show when I'd received that income. After filling that out, the penalty and interest were gone. I *think* the potential penalty was due to the uneven payments though maybe there was another reason, but I did fill out the quarterly amounts of income and deductions in 2210.

 

[pb4uski]

We are in ER but have not yet started pensions or SS so we are living off taxable accounts. Since dividends and LTCG are tax-free we would have no tax liability if not for Roth conversions. I calculate my Roth conversion amount in late December once I know what our year end dividends and capital gain distributions will be. We use the installment method so only make estimated tax payments near year end or in early January and they generally are real close to our tax liability.

It works well for the feds since I do an Form 2210 that is part of my electronic filing. The state version of the Form 2210 is not part of the electronic filing so they send me a letter annually assessing interest and penalties and I send them a response with a paper version of their Form 2210 showing that I don't owe anything because my entire tax liability arose in the quarter that I made the estimated payment and then they send me a letter telling me that the penalties and interest are abated.

This year I might try sending their Form 2210 to them before they ask for it and see if I can cut them off at the pass.

 

[target2019]

Wow, did not realize that I need to include capital gains in each quarter estimate, I am definitely under paid by quite a bit. I received a big chunk of pay as a consultation fee in January but did not realize that my estimated tax payment of the first quarter needed to be based on that payment. I just tried to estimate my income for the year and estimated my taxes from that amount then divide the estimated tax liabilities by four and made payments of equal amount each quarter.

Obviously I should have consulted with an accountant at the beginning of the year as this is my first year of retirement but I didn't.

I need to talk to an accountant.

Best thing to do is figure this out yourself, so you are not dependent on the accountant each year.

You still do have the Jan 15 payment coming up, and can try to make up what is due. Of course the penalty may be forgiven, but it is not always so.

There is nothing preventing you from sending money now, either. If you owe a lot, then getting payment to the Dept. of Treasury will head off some of the penalty, if it is assessed.

Until you enter all of the numbers into a good online calculator, what you may owe is just a guess.

If you paid 100% of last year's tax in your estimated payments for this year, that is sufficient to avoid penalty. But you'll may owe a balance in April after filing 2014 1040 forms.

 

[bizlady]

We always be sure to pay the state 4th quarter by year end, so we can use it as a deduction.

 

[NH Hiker]

And if you have not already, you may want to setup an account with eftps.gov to pay the estimated taxes electronically.

 

[jebmke]

And if you have not already, you may want to setup an account with eftps.gov to pay the estimated taxes electronically.

Makes it easy. Most years I just do the safe harbor amount and set it up for 4 quarters all at once.

I do a proforma return in December so I can true up the state taxes to get the deduction in the current year.

Never been able to get bunching to work to use Std. Deduction but it works great for charitable deductions. We bunched 15 years of charitable deductions into one year by donating appreciated stock to our DAF in a year when my income spiked right before ER. Took advantage of the maximum tax rate situation.

 

[sengsational]

... We use the installment method so only make estimated tax payments near year end or in early January and they generally are real close to our tax liability.

It works well for the feds since I do an Form 2210 that is part of my electronic filing. ....

Being new at this, I'd never heard of the installment method. Does your tax software guide you through the installment method and 2210, or does that need to be a side calculation?

 

[pb4uski]

It's more properly the Annualized Income Installment Method. You essentially do an estimated return each period based on your income to date. It works real well in my case since we are under the tax limits until December. The 2210 does require a little work to analyze your income by period but since I have almost everything in Quicken it is relatively easy for me.

Annualized Income Installment Method

If you do not receive your income evenly throughout the year (for example, your income from a repair shop you operate is much larger in the summer than it is during the rest of the year), your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.

The annualized income installment method annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period. To see whether you can pay less for any period, complete the 2014 Annualized Estimated Tax Worksheet (Worksheet 2-9).



You first must complete the 2014 Estimated Tax Worksheet (Worksheet 2-1) through line 16b.
Use the result you figure on line 32 of Worksheet 2-9 to make your estimated tax payments and complete your payment vouchers.

Note.

If you use the annualized income installment method to figure your estimated tax payments, you must file Form 2210 with your 2014 tax return. See Annualized Income Installment Method (Schedule AI) in chapter 4 for more information.

see Publication 505 (2014), Tax Withholding and Estimated Tax

 

[RunningBum]

Being new at this, I'd never heard of the installment method. Does your tax software guide you through the installment method and 2210, or does that need to be a side calculation?

Turbo Tax will divide your current year's tax by 4 and suggest you pay that amount at each of the 4 due dates for estimated tax installments. They also created voucher forms for my state installments. I do both online and I can divide by 4 so it's not big deal.

TT doesn't really help with estimating actually taxes as you go if you want to do uneven payments. For one thing, the 2014 program wasn't ready in time for earlier payments so you'd have to use 2013 and hope nothing changes too much for you. And it won't do things like applying 1/4 of your exemptions. I just use a spreadsheet. I guess you could probably multiple your income and deductions by 4 to see what the yearly amount would be, then divide the tax due by 4 to get your estimate for that quarter.

TT does guide you through form 2210 somewhat but I don't recall if it was smart enough to look at sale date of stocks and dates dividends were received, or when property taxes were paid, to group them by quarter. It seemed to me that I had to add everything up myself. I could be wrong because it seems like you've already put in dates for most or all that stuff so they should be able to do it.

 

[pb4uski]

....TT does guide you through form 2210 somewhat but I don't recall if it was smart enough to look at sale date of stocks and dates dividends were received, or when property taxes were paid, to group them by quarter. It seemed to me that I had to add everything up myself. I could be wrong because it seems like you've already put in dates for most or all that stuff so they should be able to do it.

I use a spreadsheet analysis to allocate my income to periods and use that when I do my 2210. When I first did it it was a real PITA, but once I had the "template" set, it was relatively painless to update for the next year.