How do you do estimated taxes ?

[Delawaredave5]

How do you calculate estimated taxes ? Guess there's a couple ways:

1. Pay 110% of last years liability
2. Taxcaster
3. 2014 tax program with 2015 estimated data
4. 2015 tax program with 2015 estimated data

My income used to be consistent and I didn't have many stock sales - so my extra Megacorp withholding concidentially covered taxable dividends and I was fine.

But 2015 had a lot of changes and I think I need to verify.

Thanks !

 

[bingybear]

I used a spreadsheet in March 2015 to estimate 2015 taxes. 2015 was all new with RE starting in the first quarter.

I then used it in December using distribution numbers to calculate my first roth conversion.

you could use your 2015 tax program. really you need to come up with your resulting capital gains after offsetting losses, estimate of ordinary and qualified dividends, and other income. for estimate you don't need to list all inputs, just the summary.

I've heard of taxcaster, but since I don't use turbo tax (I think it is their product), I don't use it. I get a preview copy on the taxact program in November which is pretty complete.

Look at the 1040... should be pretty simple to construct a spreadsheet once you get the totals for offset gains, ordinary dividends and qualified dividends. Account for each box on the 1040 you would normally have. But a tax program will sort out the tax on qualified and non-qualified dividends and cap gains auto maticially

 

[LOL!]

I use last year's tax software for early in the year. Then during the Thanksgiving holiday, I run all my numbers with pretty good estimates of dividends and cap gains and remaining paychecks. I have my spouse adjust their W-4 to get taxes from the remaining paychecks.

Also at Thanksgiving, I start looking for 2015 tax software deals. I buy one on sale and run a pro-forma tax return with latest data and double check. This helped me decide to do 3 Roth conversions and one Roth recharacterization.

In 2015, we had paid less than $1,000 in income taxes through Thanksgiving, so I had to have my spouse withhold more than $1,000 from each of the remaining paychecks for the year.

We will get a refund, but that refund will pay for the tax software because of the 10% rebate via gift card.

 

[RunningBum]

Edit: I was wrong, you do need to pay 100%, and $110% for higher income. So 110% is safer.

If I expect to pay around the same as or more than the year before, I make 4 even payments of 100% of last year. If my taxes due are over, I don't owe a penalty for underpayment. If I expect a lot more income, I'd pay more estimated just to avoid any red flags but I don't stress about getting it right.

If I expect to pay less, like this year where I plan to do a smaller Roth conversion, I estimate what I'd owe each quarter with a spreadsheet, by splitting the exemption into quarters and using the other income and deductions I actually expect to incur. Most of it is either in Q1 with my Roth conversion, and Q4 with year end distributions. It's not at all exact but I am conservative and overpay to make sure that if my taxes due are higher than expected, I won't owe an underpayment penalty. Sometimes I can cut way back on Q4, but if I overpay by $500 it doesn't really bother me. But I don't want to overpay by the amount I paid last year.

 

[audreyh1]

If I believe this year's income with be close or higher than the prior year, I stick with the simple quarterly payments based on 110% of prior year, then reevaluate in Jan (to see if I have covered 90% of estimated taxes owed).

If I think my income will drop, I do the annualized income method each quarter using my own spreadsheets that take a lot of work to maintain. But I hate overpaying taxes, so it's worth it in a lower income year.

This year I ran my spreadsheets in late Dec with 99% of my income known, and figured out I can skip the Jan quarterly payment as I already exceed the 90% of 2015 taxes paid threshold.

 

[Closet_Gamer]

I've built a spreadsheet that I use to do my full year budget. Each year I pull in the latest basic tax tables and built a poor man's deduction model. i also model state and local. I generally have very few capital gains so I intentionally overpay on the other stuff and assume that the capital gains will come out in the wash.

 

[scrabbler1]

I have a skeleton version of my income tax forms in a spreadsheet linked to my checkbook register. As I enter my checkbook entries, I also adjust the estimated items which relate to my income tax data. For example, when I make my monthly co-op maintenance payment, it allocates the payment toward property taxes and the co-op's mortgage interest using estimated factors. I then subtract one from multiplier which adds in the monthly payments not yet made. As the year goes on, the annual total includes more actual data and less estimated data. I have a list of non-monthly distributions from my investments I also estimate until they become known, further enabling me to hone in on my actual tax bill. The skeleton tax form includes the cap gains worksheet, a crucial component to figuring out my federal tax bill.


The year's total is linked to the skeleton tax form so I can always see what my estimated tax bill will be. It has always been small since I ERed so I make an estimated tax payment only in the 4th quarter.


The state income tax form is linked to the federal one. When I was working, I had to make a non-resident state income tax return because I worked in another state. I was very glad to erase that part of the spreadsheet after I ERed!

 

[Souschef]

I had a real problem this year, as i sold my rental and did not pay any income tax. I made an estimate for this year, and used http://https://www.eftps.gov/eftps/direct/EftpsHome.page
To set up my withdrawals from my bank account.
For Californians,
https://webapp.ftb.ca.gov/MyFTBAccess/iUserName.aspx
but this is changing

 

[athena53]

Our taxable income has always been unpredictable due to mutual fund distributions. Last year, 2015, was our first with zero wage income. That made it much easier; I just assumed our taxable income would be the max amount to fill the 15% tax bracket. It looks like we'll fall short of that so I'll do a Roth conversion to get zero refund.

 

[audreyh1]

Can you do Roth conversions after the end of the tax year?

 

[MichaelB]

Can you do Roth conversions after the end of the tax year?

nyet. Dec 31 cutoff.

 

[audreyh1]

nyet. Dec 31 cutoff.

I was afraid that was the answer.

 

[LOL!]

Can you do Roth conversions after the end of the tax year?

As noted, no.

But one can "overcontribute" before the end of the year and recharacterize some or all after the end of the year. This actually is a do-over and undoes what one did and applies to the one's taxes in the year of conversion (not the year of recharacterization).

 

[Theseus]

I've got a worksheet page that estimates the next two years tax burden pretty accurately, it is linked to YTD numbers and my biennial budget remainder numbers for income and deductible expenses. It's no Turbotax, but it does keep me on top of our 1040 forecast. I need to pay close attention as taxes are paid from distributions, so I fine tune the percentage paid from each distribution the same as I did to withholding when I was w**rking. Lots of moving parts to all of it, especially with ACA figured in – good thing I have lots of time to build overly complicated spreadsheets now.

 

[VFK57]

I do 2014 tax program with 2015 estimated data

 

[pb4uski]

#4 for me this year... sometimes #3. Also, since I would have no tax liability for the first 3 quarters of the year (my 4Q Roth conversions causes all my tax liability), I only make a single estimated payment in December.

 

[bingybear]

#4 for me this year... sometimes #3. Also, since I would have no tax liability for the first 3 quarters of the year (my 4Q Roth conversions causes all my tax liability), I only make a single estimated payment in December.

Doesn't paying all your tax in the last quarterly payment open you up to penalties unless it is paid by employer withholding? While the IRS rules allow for unforeseen lump income tax adjustments, that if certain tax payment percentages were not met in each quarter, penalties may apply. That said the penalties may not be that steep.
Unless the roth conversion was a total surprise, the IRS would expect you to pay throughout the year.

Or at least that is what I recall reading a year ago when I made my first estimated tax payment without having W-2 withholding also.

To the OP... I agree with others on just paying 100%/110% of last years taxes. For my analysis, this was my 1st year RE with only a couple months of W2 income. Even with the roth conversion (should be @ the top of 15% bracket) withholding 100%-110% would be 5 or 6 times over what I expect to pay in taxes this year. So estimating becomes really important in RE.

 

[LOL!]

I can see how pb4uski has no tax liability in the first 3 quarters, so would not have to pay any taxes including estimated taxes for those quarters. If my spouse was not working, we would be in the same situation.

And as far as just paying last year's taxes, that would have us overpaying by a factor of 4 since in 2014 I had a paycheck, but not in 2015.

Not mentioned in this thread is that one can use the IRS DirectPay instead of the EFTPS thing. DirectPay requires no pre-registration, no PIN, and no account at the IRS. It can be done in less than 5 minutes, so it is great for last minute payments, too.

 

[RE2Boys]

I almost always use 100% of the prior year tax liability for federal. In November, I also perform a best guess as to what my 1040 will look like to determine how much room, if any, for TIRA to Roth conversions. I haven't been faced with the scenario of a significant drop in income as I've been retired for almost 16 years.
If it ends up I overpayed, just roll it into the following years estimated taxes. If underpay, that's fine too. Just try to avoid penaltiy situations. Don't care if I owe lots, just so I stayed out of penalties.

 

[bingybear]

I can see how pb4uski has no tax liability in the first 3 quarters, so would not have to pay any taxes including estimated taxes for those quarters. If my spouse was not working, we would be in the same situation.

And as far as just paying last year's taxes, that would have us overpaying by a factor of 4 since in 2014 I had a paycheck, but not in 2015.

Not mentioned in this thread is that one can use the IRS DirectPay instead of the EFTPS thing. DirectPay requires no pre-registration, no PIN, and no account at the IRS. It can be done in less than 5 minutes, so it is great for last minute payments, too.

I agree I can see having so little taxable income in the first 3 quarters in RE that it seems estimated taxes are not necessary. But we are talking the IRS here. Is pb4uski using the regular or annualized estimated tax method? When I read pub 505, I did not see a "as it comes in" method.

Could someone explain where in the tax code that paying estimated tax in the way presented would eliminate the penalty and need for filing the 2210 form?

 

[kaneohe]

I agree I can see having so little taxable income in the first 3 quarters in RE that it seems estimated taxes are not necessary. But we are talking the IRS here. Is pb4uski using the regular or annualized estimated tax method? When I read pub 505, I did not see a "as it comes in" method.

Could someone explain where in the tax code that paying estimated tax in the way presented would eliminate the penalty and need for filing the 2210 form?

I think audreyh1 is the expert on this. I think it's the annualized method and you do have to file the 2210 to prove everything was timely but there should be no penalty if done correctly. Work thru SchAI on the 2210 (and the instructions) to either convince yourself that this works (or convince yourself that you will never do it again).

 

[Walt34]

Our taxes are pretty simple but we have to send estimated taxes to the state (but not federal) as the pension plan only does withholding for the state of MD. Later this year I'll start SS so that will be a change. Turbotax has a function to calculate next year's taxes, or at least it has in the past.

Say, here's a SS question I haven't seen answered - Does SS do withholding for states? If they do I could just increase the SS withholding to cover the pension estimated taxes too and not have to bother with the quarterly payments.

 

[kaneohe]

.......................- Does SS do withholding for states? If they do I could just increase the SS withholding to cover the pension estimated taxes too and not have to bother with the quarterly payments.

sounds like no........ Can Taxes Be Withheld From My SS Benefits? - AARP

 

[Walt34]

sounds like no........ Can Taxes Be Withheld From My SS Benefits? - AARP

Oh well. So much for trying to make life simpler. Bummer.

 

[audreyh1]

I agree I can see having so little taxable income in the first 3 quarters in RE that it seems estimated taxes are not necessary. But we are talking the IRS here. Is pb4uski using the regular or annualized estimated tax method? When I read pub 505, I did not see a "as it comes in" method.

Could someone explain where in the tax code that paying estimated tax in the way presented would eliminate the penalty and need for filing the 2210 form?

The "as it comes in" method is the annualized income method where you take the first quarter's income, multiply by 4, calculated taxes, and then pay 22.5% of estimated tax owed. Subsequent uneven IRS quarters have similar factors to apply. By the final tax quarter you hit the 90% of estimated taxes that must be paid in Jan 15.

I think you would have to compute via annualized method, and pay what estimated taxes are due each quarter, even if tiny. You're going to have to do this work anyway, because using this technique will mean filing the 2210 to prove you don't owe penalties for underpayment for the first three quarters. So you'll eventually need those quarterly numbers to fill out the form.