How do you estimate taxes?

[audreyh1]

Quote:

Originally Posted by thinker25 I may just have to pay what I owed in 2009 and I think if I've paid the same I have no penalties.... I think. Okay I'll go check the IRS site, too. All other help WELCOME! No income from work after July, I think.

Yes - that will work (if your 2009 income was under $150K for married filing jointly or $75K otherwisein which case it's 110% of 2009 taxes paid) in 4 equal installments.

And, if later in the year you decide you are overpaying, you can always revert to another method in later quarters.

Audrey

[DeborahB]

I decided it was too late to try to figure out what MIGHT happen - it's due tomorrow. So I paid exactly 25% of what my taxes were in 2009, to state and federal, and will do that for the rest of the 3 quarters. If it comes out terribly off, I can reconsider in January or so as to 2011.

I may have higher taxes for 2010 because I'm converting part of an IRA to a Roth. I'm considering paying all the tax in 2010 - I think the tax rates will go up after 2010. Ugh.

Thanks for all the wisdom - I'm going to try to work the numbers for next year - or pay a CPA... sigh.

[DeborahB]

Quote:

Originally Posted by W2R Luckily it worked pretty well for me last year, even though I didn't really know what my dividends and LTCG would be for 2009. I used historical values to estimate what I might get, based my estimated taxes on that, and this resulted in a refund of $1748. That's not exact, but "good enough for government work", as they say. This year I have a bigger portfolio, and instead of my salary I have taxable withdrawals from the TSP, pension, and other complexities that I didn't have last year, so I am less sure but I think it will be OK. Next year I can base my estimated income and taxes on this year's income and taxes since I do not expect any big changes.

I have the same issues - I'm not sure what buckets I will take the necessary money from after I retire. So the form didn't seem to work. Also I didn't see a place to add money taken from an IRA or whatever. Too crazy!

[audreyh1]

Quote:

Originally Posted by thinker25 I decided it was too late to try to figure out what MIGHT happen - it's due tomorrow. So I paid exactly 25% of what my taxes were in 2009, to state and federal, and will do that for the rest of the 3 quarters. If it comes out terribly off, I can reconsider in January or so as to 2011.

That is just fine for what is due tomorrow. And you are covered so far. [I hope you took into account what had been already withheld so far out of your paycheck]

But you can still go back and figure more precisely in future quarters and lower you payment if it looks like you are paying too much. There is no rule that says you can't change your method in later quarters based on income so far.

Audrey

[audreyh1]

Quote:

Originally Posted by thinker25 I have the same issues - I'm not sure what buckets I will take the necessary money from after I retire. So the form didn't seem to work. Also I didn't see a place to add money taken from an IRA or whatever. Too crazy!

Money drawn from an IRA (provided you are at least 59 1/2) is treated the same way as earned income (salary) by the IRS.

But basically it's this lack of predictability of the income stream that has me using the AI method most years. Most of my investments are in taxable accounts, and you just never know what the distributions are going to be and they can vary quite a bit year-to-year. Plus some years I realize capital gains which really changes my income stream.

But seriously, if there is a gradual increase in year-after-year income, then paying same amount as the taxes from the prior year makes the most sense. It's the least amount of calculation, you'll never owe a penalty, and you are unlikely to overpay estimated taxes.

Audrey

[DeborahB]

Quote:

Originally Posted by audreyh1 That is just fine for what is due tomorrow. And you are covered so far. [I hope you took into account what had been already withheld so far out of your paycheck] But you can still go back and figure more precisely in future quarters and lower you payment if it looks like you are paying too much. There is no rule that says you can't change your method in later quarters based on income so far. Audrey

Since I was maxing out a 401K in 6 months AND putting $ into a pre-tax medical fund AND my health insurance is pre-tax... I discovered I have only paid about $500 total in federal tax to date. Eeeek. I didn't even bother to deduct 1/4 of that. I just paid 25% of what I owed for 2009, wrote the checks, and cursed. The checks are in the mail.

I really appreciate all the help. I had just assumed that since I hadn't officially "planned" (announced) retirement, I could get around dealing with this until the Sept. payment was due. I decided it was more prudent (if financially painful) to pay quarterly for now. I'll have a good idea in January what happened - maybe even in September.

Thanks for mentioning I can amend it later if I'm paying too much. I am so not in favor of free loans to the IRS!

Thanks again for all the links, help, etc. In a year I can be the expert and help someone new, I hope!

Additional input is still welcome - this has been really helpful, probably not just to me.

[donheff]

I have spent some time running Turbo Tax scenarios for next year since our income will drop precipitously since DW ERed. I think I have it forecast pretty well but we will see. After next year the changes should be gradual with the likelihood being that taxes will gradually increase as we begin to tap 401Ks/IRAs. As I understand it, we will be fine as long as we withhold at least 100% of the previous year's taxes, correct?

[audreyh1]

Quote:

Originally Posted by thinker25 Since I was maxing out a 401K in 6 months AND putting $ into a pre-tax medical fund AND my health insurance is pre-tax... I discovered I have only paid about $500 total in federal tax to date. Eeeek. I didn't even bother to deduct 1/4 of that. I just paid 25% of what I owed for 2009, wrote the checks, and cursed. The checks are in the mail.

Actually, you could have deducted ALL of what you had withheld so far. But it's only $500 so probably doesn't matter. For your next estimated payment installment you can deduct all tax withheld year-to-date.

You're welcome for all the help. I've been paying estimated taxes for 12 years now and been through a lot of different scenarios.

Audrey

[audreyh1]

Quote:

Originally Posted by donheff I have spent some time running Turbo Tax scenarios for next year since our income will drop precipitously since DW ERed. I think I have it forecast pretty well but we will see. After next year the changes should be gradual with the likelihood being that taxes will gradually increase as we begin to tap 401Ks/IRAs. As I understand it, we will be fine as long as we withhold at least 100% of the previous year's taxes, correct?

Yes, if your household income was <$150K (married joint filers). Otherwise you need to pay 110% of prior year's taxes to be safe.

If, as you go through the year, you think you might be way overpaying because your income is much less than prior year, you can change to the annualized income method.

Audrey

[DeborahB]

Quote:

Originally Posted by audreyh1 Actually, you could have deducted ALL of what you had withheld so far. But it's only $500 so probably doesn't matter. For your next estimated payment installment you can deduct all tax withheld year-to-date. You're welcome for all the help. I've been paying estimated taxes for 12 years now and been through a lot of different scenarios. Audrey

Thanks - I'll take the $500 (or whatever it is) off the next payment. It wasn't enough to bother about (divided into 4, I mean).

Had I thought of this earlier...!!!

[metabasalt]

Quote:

Originally Posted by audreyh1 Well - pensions are pretty easy because the income is predictable and paid out evenly. And I suspect the pension company will do the withholding for you, so it might not be much different than a salary tax-wise (except no FICA). Issues arise when you have enough investment income or capital gains in addition to your pension to increase your tax liability such that you underpay via withholding. Audrey P.S. Geologist?

Thanks Audrey. My introduction to this was actually filling out the forms for the pension withdrawal for taxes. I THINK I did it correctly but is was all a great surprise to me and had to be done in a great hurry. Eventually I'll have to consider investment income. No, not a geologist. It's just a subject I've gotten interested in over the last 5-10 years. I'm also a birder. So now it's really unsafe to drive with me. If I'm not looking away from the road at birds I'm looking away from the road at formations!

[DeborahB]

I think I'm going to talk to a CPA about how to proceed - not today - in a few weeks - let him recover from the April 15 madness . Not for someone to do my taxes (I think) but to help with strategy and penalties and so on.

I got a referral to someone. This year is going to be the year for decisions and strategies - after that it will be less complex. He should be able to advise on the best way to take money out to live on - which bucket to tap first etc. I've got taxable income, tax-deferred income (IRA) and Roth IRAs and 2010 converted Roth IRA money (when to pay the tax...). And I do my own investing (with a broker).

Thanks again, wheeeeeeeeeee!

[Moemg]

Quote:

Originally Posted by audreyh1 This year I did it the easy way. I took the 2009 taxes owed, divided them by four and am paying that each quarter. This is the easiest way. But if you think your taxes due in 2010 will be significantly lower than last years taxes due, this will cause you to overpay. Still, no worries about penalties. Audrey

I do a version of this . I just divide my taxes owed my 12 and have monthly amounts taken from my pension . I've been doing it for three years and it's pretty painless .

[audreyh1]

Quote:

Originally Posted by Moemg I do a version of this . I just divide my taxes owed my 12 and have monthly amounts taken from my pension . I've been doing it for three years and it's pretty painless .

Yep - it's pretty easy when all your annual income is from a pension. That means it is a known quantity, and it can be treated just like it was at work with tax withholding.

It's when you have other sources of income (IRA withdrawals, investment income, realized capital gains, etc.) that it becomes tricky as these often aren't predictable.

Well, the IRA withdrawals probably are predictable since they are under your control and if taken in the first quarter you already know what you will owe for the year by April 15.

It's the others that can be really unpredictable. You never know what kind of distributions you are going to get from your mutual funds and most of them occur near the end of the ear. If you have lots of mutual funds in taxable accounts, this can be a large chunk of your impossible-to-predict annual income.

Audrey

[audreyh1]

Quote:

Originally Posted by Moemg I do a version of this . I just divide my taxes owed my 12 and have monthly amounts taken from my pension . I've been doing it for three years and it's pretty painless .

Yep - it's pretty easy when all your annual income is from a pension. That means it is a known quantity, and it can be treated just like it was at work with tax withholding.

It's when you have other sources of income (IRA withdrawals, investment income, realized capital gains, etc.) that it becomes tricky as these often aren't predictable.

Well, the IRA withdrawals probably are predictable since they are under your control and if taken in the first quarter you already know what you will owe for the year by April 15.

It's the others that can be really unpredictable. You never know what kind of distributions you are going to get from your mutual funds and most of them occur near the end of the ear. If you have lots of mutual funds in taxable accounts, this can be a large chunk of your impossible-to-predict annual income.

Audrey

[donheff]

Quote:

Originally Posted by Moemg I do a version of this . I just divide my taxes owed my 12 and have monthly amounts taken from my pension . I've been doing it for three years and it's pretty painless .

Quote:

Originally Posted by audreyh1 Yep - it's pretty easy when all your annual income is from a pension. That means it is a known quantity, and it can be treated just like it was at work with tax withholding. It's when you have other sources of income (IRA withdrawals, investment income, realized capital gains, etc.) that it becomes tricky as these often aren't predictable.

You can still do it in more complicated situations. DW ER'd this year but will continue to have a small income from her firm (K1). We also pull from our portfolio. The sum of those two sources is about equal to my pension. I ran Turbo Tax scenarios to get a decent fix on total Fed and state taxes and am having the whole amount withheld from my pension. I don't want to bother with quarterlies. If I decide mid-year that I am high or low I can adjust my withholding online. This year is the most fuzzy. After that I can just take the 100% of previous year's tax approach -- should be very simple.

[audreyh1]

Yep, it's simple if your year-to-year income does not vary widely or is a known quantity, and if the income is taken either all in the first quarter, or taken out evenly throughout the year.

Unfortunately, for some of us living off taxable investments, none of the above is true.

Audrey

[donheff]

Quote:

Originally Posted by audreyh1 Yep, it's simple if your year-to-year income does not vary widely or is a known quantity, and if the income is taken either all in the first quarter, or taken out evenly throughout the year. Unfortunately, for some of us living off taxable investments, none of the above is true. Audrey

All I am saying is that if either you or your spouse have a sizable pension, and the ability to easily change withholding, having the provider do the withholding from the pension payments is as easy or easier than filing quarterlies. If your income varies significantly that will impact your quarterlies just like it will impact your withholding rates.

[Martha]

Quote:

Originally Posted by donheff All I am saying is that if either you or your spouse have a sizable pension, and the ability to easily change withholding, having the provider do the withholding from the pension payments is as easy or easier than filing quarterlies. If your income varies significantly that will impact your quarterlies just like it will impact your withholding rates.

The last couple of years of work I worked very part time. I simply withheld nearly all my income in taxes and did not pay any estimates. I took a small draw (all withheld for taxes) with most of my income from the firm paid in June and December, so it was relatively easy to figure out by December if enough had been withheld and adjust accordingly.

[meierlde]

BTW the interest rate on underpayments is only 4% per annum see form 2210 line 30 where the penalty is percent of the year you underpaid each installment times .04. So if you are a little low 10 to 20 percent its not a real big deal.