Estimated taxes in the year of retirement

[JoeWras]

Folks, what did you do for estimated taxes in the year you retire?

I have my estimated taxes down to a science. Well, a science of 30 years of previous payments. We always had 12 month jobs, and most of the estimated taxes were paid using the "additional per paycheck" method. I did reserve actual IRS quarterly payments for a little bit more to adjust the float based on market conditions of interest rates and expected cap gains.

Anyway, my head is swimming with all the moving parts:

• We are both working about 1/2 year
• I'll have a bit of a vacation payout, DW will have loads of sick payout and other stuff I can't begin to figure out
• We have decent dividend and cap gain income expected this year. It will be a factor.
• I won't get a full year of "additional per paycheck" withholding
• We're still not sure what our charitable deduction will be this year, and yes we plan to go over the new standard deduction
• 2018 tax reform

I'm finishing our 2017 taxes now, and am so pleased to have worked it out to just a small payment this year for both fed and state. Perfect.

When I look at my quarterlies for 2018, my head explodes.

Any suggestions?

 

[SecondCor521]

Cut yourself some slack for 2018 - you won't get things very close because of the massive changes in your life. I bet you didn't get it close the first year you were working either. You can work on optimizing it over the next year or two.

If you had your withholding dialed in for 2017 - that is, your withholding from work pretty much covered your tax liability - then I'd guess you'll get a refund for 2018 because of the progressive nature of our tax system - one half of a year of withholding should cover taxes on one half of a year of income. Your employer will likely withhold adequate taxes from your and your DW's final payouts - possibly even more than adequate.

If you want to be more precise, you can do a proforma tax return around November when you'll know all of the amounts better. Then you can adjust via a number of different mechanisms: charitable contributions up or down, realizing capital gains or losses or not, making an estimated tax payment by 1/15, making contributions to traditional IRAs.

 

[marko]

Cut yourself some slack for 2018 - you won't get things very close because of the massive changes in your life. I bet you didn't get it close the first year you were working either. You can work on optimizing it over the next year or two.

I'm supposed to pay quarterlies. I don't.

Every year, my accountant gives me a nice package saying how much to send in each quarter. I put the package in my desk drawer.

At tax time (now), I pay a small fine (under $300) and I'm done with it until next year. They can wait for their/my money.

 

[pb4uski]

Two ideas.

Use TT What-If worksheet or similar tax calculator to estimate your taxes for 2018 based on what you know and then compare to your withholding to see if you even need to make estimated payments... you may not need to at all.

Alternatively, if you are over 59 1/2 you can do a calculation of your taxes this December and if your withholdings are short do a tIRA withdrawal for any shortfall and do 100% withholding... the IRS treats such withholdings as done evenly throughout the year in calculating underwithholding penalities.

 

[USGrant1962]

If you had your withholding dialed in for 2017 - that is, your withholding from work pretty much covered your tax liability - then I'd guess you'll get a refund for 2018 because of the progressive nature of our tax system - one half of a year of withholding should cover taxes on one half of a year of income.

This. I was paid (and withheld) through Independence day last year, had the usual divs/CGDs, and got a huge refund. In the past, with the same withholding allowances I would usually owe a couple $K.

 

[JoeWras]

This. I was paid (and withheld) through Independence day last year, had the usual divs/CGDs, and got a huge refund. In the past, with the same withholding allowances I would usually owe a couple $K.

That's a good point!

I think what I'm going to do is take our estimated dividend income, use the table to estimate the tax on that, then subtract my extra per paycheck I'm throwing in, and divide by 4. That should result in a refund because of the bracket creep you guys mentioned.

I don't like refunds, but I abhor fines.

 

[audreyh1]

Two ideas.

Use TT What-If worksheet or similar tax calculator to estimate your taxes for 2018 based on what you know and then compare to your withholding to see if you even need to make estimated payments... you may not need to at all.

Alternatively, if you are over 59 1/2 you can do a calculation of your taxes this December and if your withholdings are short do a tIRA withdrawal for any shortfall and do 100% withholding... the IRS treats such withholdings as done evenly throughout the year in calculating underwithholding penalities.

If you do the first part, and find that by Dec 2018 you are a little short, you can make it up in the Jan 15 estimated tax payment. By Jan 15 you will only owe 90% of current year taxes. This should minimize any penalties due to underpayment in the early quarters.

Also, if it turns out that most of your income was received in Sept-Dec 2018, you can use Form 2210 to calculate what you owed according to the annualized income method and probably avoid penalty if you met the 90% rule. This does require that you determine the timing by month of all your taxable income.

 

[audreyh1]

That's a good point!

I think what I'm going to do is take our estimated dividend income, subtract my extra per paycheck I'm throwing in, and divide by 4. That should result in a refund because of the bracket creep you guys mentioned.

I don't like refunds, but I abhor fines.

You can also figure an estimate near the end of the year and reduce your Jan 15 estimated tax payment so that you don’t overpay too much.

You may abhor fines, but many of us abhor refunds even more, especially in these days of tax fraud which can gum up a refund - serious delays, etc.

I always try to owe some, staying within the safe harbor rules as possible.

 

[gauss]

I always have withheld at least 100% of last year's actual income tax due.

I can then sleep well at night and know that I will be protected from any under withholding penalties due to the safe harbor provisions.

I believe the % increases slightly for higher income folks.

I have no problem having the government hold a bit more of my money than absolutely required due to the following:

• Low interest rate environment
• Sufficient cash flow to support this strategy

-gauss

 

[joylesshusband]

Alternatively, if you are over 59 1/2 you can do a calculation of your taxes this December and if your withholdings are short do a tIRA withdrawal for any shortfall and do 100% withholding... the IRS treats such withholdings as done evenly throughout the year in calculating underwithholding penalities.

Or, since you are under 59 1/2, you could do a tIRA -> Roth IRA conversion instead of a tIRA withdrawal, and do (up to) 100% withholding, eliminating any sort of estimated tax payments just as above.

 

[JoeWras]

I always have withheld at least 100% of last year's actual income tax due.

Although I don't mind a small refund in these low interest years, that strategy of 100% is a non-starter for this year.

We're only working 1/2 year. If I were to withhold that much, it would be way too much.

So, this is a unique year for us.

Thanks for everyone's suggestions so far. They are very good.

 

[gerntz]

If you're 59.5+ & have IRA funds, you can make a single tax payment near the end of the year with a penalty-free IRA direct tax payment withdrawal rather than with estimated tax payments.

 

[RunningBum]

All of your wage income, including the vacation and sick payout, will be subject to withholding, so that income is handled, right?

The estimated payment due April 16 covers income up to April 1. Pay 15% on any dividends and CG distributions. If you have a lot of interest, NQ divs, and STCGs, pay your expected marginal rates on those.

Do the same thing for the other 3 quarters. You are estimated taxes, but you can base it on real income so far, so it's less guesswork than you think.

This system gets to be a bit of a pain if you continue it in a year where you don't work because it's likely that a lot of your income comes in end of the year distributions. The IRS assumes an even income flow and if you've been paying light the first three quarters, you'll have to show which quarter your income and expenses landed to prove that you were paying properly.

As long as you pay 90% or owe less than $1000 you won't get fined, so don't stress about getting it really close.

 

[gauss]

Do you have tax software for 2017 or 2016 available? If not, there are lots of web based tax packages that will allow you to "start for free".

Put in your planned income and see what the tax comes out to be and plan to have that withheld. You could try jacking up your W2 withholding to cover the amount over half the year if your employer will cooperate.

You could also divide by four and send in the quarterly 1040-ES.

As others have suggested, if you have a traditional IRA, just do a withdrawal so that you can withhold the amount needed and then rollover back to the same traditional IRA with after tax funds.

Lots of options here if you have some idea what your income is, which it sounds like you will.

-gauss

 

[JoeWras]

Yes, I use Turbotax. I can model things.

I don't mind getting on the estimated payment train, so I don't desire to mess with my w*rk withholding, which is going to disappear pretty soon.

I appreciate some of the other out-of-the-box suggestions here like looking at IRA. Cool.

My stress level is reducing already. Thanks again!

 

[scrabbler1]

In the year I retired (2008), I received a large, lump-sum distribution from cashing out my company stock in early November for which there would be no taxes withheld.


On the federal side, I got myself into a safe harbor by making sure my total taxes withheld via W-2 plus any estimated taxes I paid by mid-January, 2009, were at least my 2007 total tax liability. I paid $4,000 in estimated taxes and paid the remaining $46,000 in April, 3 months later.


On the state side, I wanted to be able to deduct my state income taxes on my federal return right away and not have to wait a whole year. So, I paid nearly all of the nearly $23,000 I owed by the end of December (to two different states; I worked in a state I didn't live in). With the state returns, it was tough figuring out what I'd end up owing overall because I still had 2 months of distributions including the end-of-year ones (which were small, this was 2008).


I was in a safe harbor for all 3 taxing jurisdictions, and I paid the balances in April. I ended up owing about $700 to the two states but was able to deduct the large estimated tax payments on the 2008 federal return. Those deductions were limited due to having a large income, but I still ended up ahead versus taking them as deductions in 2009 because my 2009 income was much, much lower, and I was in low marginal bracket.

 

[gauss]

...

I appreciate some of the other out-of-the-box suggestions here like looking at IRA. Cool.

..

Be aware that you are limited to (1) one indirect (aka 60-day) IRA rollover every 365 days, so hopefully you haven't done one already this year (or late in 2017).

Full details on the restrictions are available in IRS Publication 590-A under the "Rollover From One IRA into Another Section" beginning on pg 23.

A one-pager from the IRS regarding this rule is also available here.

-gauss

 

[audreyh1]

I always have withheld at least 100% of last year's actual income tax due.

I can then sleep well at night and know that I will be protected from any under withholding penalties due to the safe harbor provisions.

I believe the % increases slightly for higher income folks.

I have no problem having the government hold a bit more of my money than absolutely required due to the following:

• Low interest rate environment
• Sufficient cash flow to support this strategy

-gauss

My income varies too much and I would end up overpaying some years. After unusually high income years I use the annualized income method. After low or normal income years I use the 110% of prior years taxes divided by 4 method.

 

[audreyh1]

Or, since you are under 59 1/2, you could do a tIRA -> Roth IRA conversion instead of a tIRA withdrawal, and do (up to) 100% withholding, eliminating any sort of estimated tax payments just as above.

I don’t get this.

And the problem with IRA withdrawals is that they increase your income, and thus will increase the taxes owed.

So only if you were going to draw on your IRA or do Roth conversions anyway.

And when doing a Roth conversion it’s optimal to pay the taxes elsewhere and convert the whole amount. Not pay all or most of the taxes from the converted funds. What do you have left to put in your Roth?

 

[audreyh1]

In the year I retired (2008), I received a large, lump-sum distribution from cashing out my company stock in early November for which there would be no taxes withheld.


On the federal side, I got myself into a safe harbor by making sure my total taxes withheld via W-2 plus any estimated taxes I paid by mid-January, 2009, were at least my 2007 total tax liability. I paid $4,000 in estimated taxes and paid the remaining $46,000 in April, 3 months later.


On the state side, I wanted to be able to deduct my state income taxes on my federal return right away and not have to wait a whole year. So, I paid nearly all of the nearly $23,000 I owed by the end of December (to two different states; I worked in a state I didn't live in). With the state returns, it was tough figuring out what I'd end up owing overall because I still had 2 months of distributions including the end-of-year ones (which were small, this was 2008).


I was in a safe harbor for all 3 taxing jurisdictions, and I paid the balances in April. I ended up owing about $700 to the two states but was able to deduct the large estimated tax payments on the 2008 federal return. Those deductions were limited due to having a large income, but I still ended up ahead versus taking them as deductions in 2009 because my 2009 income was much, much lower, and I was in low marginal bracket.

That’s what I did - I had a very large tax bill for 1999 due to selling company stock the same year I retired in August, but I once I had exceeded the 1998 taxes paid I knew I was in safe harbor so we waited until April 15 to pay the balance.

Then in 2000 I learned how to do the Annualized Income method for estimated taxes!

 

[audreyh1]

Be aware that you are limited to (1) one indirect (aka 60-day) IRA rollover every 365 days, so hopefully you haven't done one already this year (or late in 2017).

Full details on the restrictions are available in IRS Publication 590-A under the "Rollover From One IRA into Another Section" beginning on pg 23.

A one-pager from the IRS regarding this rule is also available here.

-gauss

I don’t think anyone was recommending an IRA rollover, and Roth conversions are not limited.

 

[joylesshusband]

And when doing a Roth conversion it’s optimal to pay the taxes elsewhere and convert the whole amount. Not pay all or most of the taxes from the converted funds. What do you have left to put in your Roth?

Money is fungible.

If one is using Roth for withdrawals to cover annual living expense, the "whole amount" conversion is equal to a conversion of a partial amount and taxes paid from the converted funds.

In the first case, the amount needed for living expense is taken from the Roth while the tax amount is taken from other (after-tax) savings.

In the second case, the tax amount is taken from the Roth (via withholding in December) while a portion of the living expense is taken from the Roth and another portion - from the other (after-tax) savings (equal to the tax amount).

Exactly the same outcome, making withholding possible and obsoleting the entire "estimated tax payments" monkey business.
Q.E.D.

 

[kaneohe]

Or, since you are under 59 1/2, you could do a tIRA -> Roth IRA conversion instead of a tIRA withdrawal, and do (up to) 100% withholding, eliminating any sort of estimated tax payments just as above.

Not sure how this works........if you are < 59.5 and do a Roth conversion but withhold 100%, then nothing gets into the Roth . Isn't the withholding then taxed and penalized because of < 59.5 withdrawal ?

 

[joylesshusband]

Not sure how this works........if you are < 59.5 and do a Roth conversion but withhold 100%, then nothing gets into the Roth . Isn't the withholding then taxed and penalized because of < 59.5 withdrawal ?

A conversion is not a withdrawal.
If you meant that the tax withholding is construed as a Roth withdrawal, be aware that withdrawals from Roth - up to the total of contributed (or converted) amounts - are neither taxed nor penalized.
The earnings on said contributions are a different story, depending on age and/or 5-year history....

 

[bingybear]

A conversion is not a withdrawal.
If you meant that the tax withholding is construed as a Roth withdrawal, be aware that withdrawals from Roth - up to the total of contributed (or converted) amounts - are neither taxed nor penalized.
The earnings on said contributions are a different story, depending on age and/or 5-year history....

don't roth conversions start a new 5 year waiting period?