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How much extimated taxes should I pay and where is the tax primer for newly ERs?
Old 02-06-2014, 12:16 PM   #1
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How much extimated taxes should I pay and where is the tax primer for newly ERs?

I retired at the end of 2013 and no longer working. I received a one time consulting fee in Jan for $235,000, this will be the only income associated with work (earned income?) for 2014 as I will be getting a 1099 at the end of this year.

I did some research on estimated tax that I need to pay for the first quarter (Fed, SS, State) but still do not know how much to pay? Also was confused by the article in the WSJ below, looks like I will be eligible to deduct things such as health insurance and perhaps other deductions?

ROI: How to Avoid Paying Income Taxes - WSJ.com

I did download 1040ES but still can't figure out how much estimated tax I need to pay in April. Aside from the consulting fee, the rest of the income this year will probably come from interest and dividends.

Also, is there a place for researching the withdrawing strategy and how much to withdraw to minimize taxes (for newly retired).

Thanks.
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Old 02-06-2014, 12:33 PM   #2
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Try TaxCaster (google it, it's free to use) to get a ballpark number for federal taxes in 2014. Use a simple percentage ratio based on when the income occurs in the four quarters of the year (again an approximate guess per quarter is fine). Finally, use EFTPS to pay those amounts each quarter.
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Old 02-06-2014, 12:50 PM   #3
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You can send in the safe harbor amount, which is 90-110% of what you paid last year.

Do you need that cash now? You can set up a solo 401k (or solo Roth 401k) and put aside a lot (as in, >$50,000) for later.

Yes, you can deduct health insurance premiums.

A more accurate withholding number would take some work. Really, you're looking at 15.3% for non-income taxes, up to the SS max of $117k, and then 2.9% after that. Then you'd hit the income tax tables with 1/2 of the above amount....

Eh, it'd probably easier to use this year's tax program and do an experiment.
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Old 02-06-2014, 02:45 PM   #4
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You can send in the safe harbor amount, which is 90-110% of what you paid last year.

Do you need that cash now? You can set up a solo 401k (or solo Roth 401k) and put aside a lot (as in, >$50,000) for later.

Yes, you can deduct health insurance premiums.

A more accurate withholding number would take some work. Really, you're looking at 15.3% for non-income taxes, up to the SS max of $117k, and then 2.9% after that. Then you'd hit the income tax tables with 1/2 of the above amount....

Eh, it'd probably easier to use this year's tax program and do an experiment.
+1. You can send in your 2014 estimated taxes in four equal payments, no need to pay it all now. The first payment is due April 15th, so you have a little time to think about it.

If your safe harbor amount is less than the tax amount you estimate for 2014, then use the safe harbor amount (paid in four equal quarterly payments) and you'll owe the difference in April 2015, but with no penalty. If you are sure you will owe less in 2014 than you paid in 2013, then you can pay that amount instead.

You can set up the quarterly payments using EFTPS fairly simply. Then you won't have to do anything after that.
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Old 02-07-2014, 04:43 AM   #5
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I just got a good tax guy and let him sort it.

Taxes in ER boggle me.
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Old 02-07-2014, 10:02 AM   #6
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Thanks for all replies, the safe harbor won't work, it is much higher than the estimated tax for sure.

Looks like I may need a good tax accountant to help plan my finance this year.
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Old 02-07-2014, 11:11 AM   #7
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Looks like I may need a good tax accountant to help plan my finance this year.
My experience has been that our CPA is well worth his fees.

Before I retired I knew there would be a year or two of very high taxes (when I cashed in my company options and other items). I really didn't want to screw up our taxes that year!

So I found a CPA and used him for my humdrum taxes a couple years. This familiarized him with our situation and gave us some time to test him out.

I've keep him doing our taxes since then. He usually has good suggestions (Roth conversions, maximizing our use of 0% capital gains taxes, HSA, etc.) and has saved us more money that he's cost us.
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Old 02-10-2014, 05:16 AM   #8
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If you just want to pay your estimated taxes, you really don't need a fancy planner.

If your other income outside of the 235k will be small, just swag it, add it on, run your total through taxcaster, and divide into quarterly amounts for payment.

If your other income will be large relative to 235k, or it may vary quite a bit, you can account for it as it comes in and up your payments in later quarters accordingly. Your tax tool will let you use the "annualized method" to account for that uneven income later, basically prorating the tax you owe based on when you received income.

If you're off by a bit at some point along the way, the penalty (interest, really) is pretty trivial with the low rate environment we're in. Like, possibly a lot less than what you'd pay that tax person.

It will be harder to get your Q1-Q3 taxes precisely correct compared to before. On the other hand, you can generally run your final numbers late in the year and know exactly what you need to send by the following April to true it up.

If you do want guidance on other techniques to lower your tax burden, that's where having a professional or spending a lot of time reading the forums could help you uncover additional tricks. If you feel like you already know a lot of those, on the other hand, you will probably find that the marginal benefit is small or even negative after fees.

Good luck.
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Old 02-10-2014, 09:42 AM   #9
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If you just want to pay your estimated taxes, you really don't need a fancy planner.

If your other income outside of the 235k will be small, just swag it, add it on, run your total through taxcaster, and divide into quarterly amounts for payment.

If your other income will be large relative to 235k, or it may vary quite a bit, you can account for it as it comes in and up your payments in later quarters accordingly. Your tax tool will let you use the "annualized method" to account for that uneven income later, basically prorating the tax you owe based on when you received income.

If you're off by a bit at some point along the way, the penalty (interest, really) is pretty trivial with the low rate environment we're in. Like, possibly a lot less than what you'd pay that tax person.

It will be harder to get your Q1-Q3 taxes precisely correct compared to before. On the other hand, you can generally run your final numbers late in the year and know exactly what you need to send by the following April to true it up.

If you do want guidance on other techniques to lower your tax burden, that's where having a professional or spending a lot of time reading the forums could help you uncover additional tricks. If you feel like you already know a lot of those, on the other hand, you will probably find that the marginal benefit is small or even negative after fees.

Good luck.
Hi Symbiotic:
Thanks again, my tax situation had been very simple for the last many years. No mortgage, and the only deductions I was able to take advantage of were the property tax and the charitable contribution.
In 2014, the only earned income is the consultation fee (1099) which I believe makes my a self-employed and I would like to minimize my taxes. I believe the Solo 401K mentioned above will let me sock away $57,500, then there is HI premium, but I do not know about anything else as I was always an employee. Not sure if consulting a CPA is worthwhile or not. I will not have any earned income in 2015. I also would like to make sure to manage my income in the future to not subject myself to more taxes unnecessarily.

mp
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Old 02-10-2014, 01:18 PM   #10
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Hi Symbiotic:
Thanks again, my tax situation had been very simple for the last many years. No mortgage, and the only deductions I was able to take advantage of were the property tax and the charitable contribution.
In 2014, the only earned income is the consultation fee (1099) which I believe makes my a self-employed and I would like to minimize my taxes. I believe the Solo 401K mentioned above will let me sock away $57,500, then there is HI premium, but I do not know about anything else as I was always an employee. Not sure if consulting a CPA is worthwhile or not. I will not have any earned income in 2015. I also would like to make sure to manage my income in the future to not subject myself to more taxes unnecessarily.

mp
It definitely is! With $$$ & complexities involved here, a CPA (or other solid tax pro) could be crucial in not only advising how to best handle 2014 taxes but charting future actions as well. For example, HI premiums are deductible for self-employed IF established "in the name of the individual or in the name of the business" (p18, IRS Pub 535). Most seem to feel this generally does not include COBRA since plan would be former employer's.
http://www.irs.gov/pub/irs-pdf/p535.pdf

BTW I'm a big DIY'er in financial matters who only hires professional assistance when prudent to do so.
Good luck!
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Old 02-10-2014, 05:07 PM   #11
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Originally Posted by Disappointed View Post
I retired at the end of 2013 and no longer working. I received a one time consulting fee in Jan for $235,000, this will be the only income associated with work (earned income?) for 2014 as I will be getting a 1099 at the end of this year.

I did some research on estimated tax that I need to pay for the first quarter (Fed, SS, State) but still do not know how much to pay? Also was confused by the article in the WSJ below, looks like I will be eligible to deduct things such as health insurance and perhaps other deductions?

ROI: How to Avoid Paying Income Taxes - WSJ.com

I did download 1040ES but still can't figure out how much estimated tax I need to pay in April. Aside from the consulting fee, the rest of the income this year will probably come from interest and dividends.

Also, is there a place for researching the withdrawing strategy and how much to withdraw to minimize taxes (for newly retired).

Thanks.
Assuming last year's income was quite a bit less, but still over $150K filing jointly.

Pay last years income tax X 110% (1.1) divided by 4 on April 15, and pay the same on June 15, September 15, and Jan 15 of 2015. This puts you in the "safe harbor" and you don't owe the remainder until April 15 2015. But be sure to set aside the funds to pay those taxes!
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Old 02-10-2014, 05:20 PM   #12
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Thanks for all replies, the safe harbor won't work, it is much higher than the estimated tax for sure.

Looks like I may need a good tax accountant to help plan my finance this year.
OK - then you can use the annualized income installment method. That's the only other safe technique.

You owe:
25% of the taxes due on 4X $235K income on April 15. That will be hefty!

On June 15, you owe 45% of the taxes due on 2.4X $235K (assuming that is your only income year-to-date).
On Sept 15, you owe 67.5% of the taxes due on 1.5 X $235K
On Jan 15, 2015, you owe 90% of the taxes due on $235K
On April 15, 2015 you pay the remainder (or get some back if you overpaid estimated taxes).

Since this is your first time self-employed, things are way more complex. You have to pay Social Security along with your taxes. Health insurance premiums are deductible. You can sock a large amount away in a SEP-IRA. Sounds like you do need a tax person to get you going with all the new forms and filing requirements.
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Old 02-10-2014, 11:01 PM   #13
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Thanks Audrey, safe harbor won't work, 110% of 2013 tax would be way, way too much. I think I need to find a tax accountant to help me with 2014.
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Old 02-11-2014, 05:53 AM   #14
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I entered you as single, with $235K AGI, and nothing else in your favor.

The tax program I use calculates the tax at nearly $15K per quarter. If you enter the money as self-employment profit, the tax goes up to $20K per quarter. I've rounded off the numbers, just so you don't send in that money and blame me later!

The best way to handle this is to get your 2013 taxes done by a tax pro, and then discuss the 2014 estimates that their software makes for you. The pro can enter other adjustments to income, dividends, and work on the retirement contribution thing (if it is legit).

One question I'd ask is whether or not you can establish a business for just one consulting check from your employer. I don't pretend to know the answer to that. I'd be concerned that this 1099 would be looked at as severance.

Good luck with all...
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Old 02-11-2014, 06:20 AM   #15
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If all this income was earned in the 1st quarter, you should pay all the taxes owed on it in the first quarter, so I don't think 4 equal intallments is going to work if you want to avoid a penalty.

I also don't think you have to be that accurate with this. Subtract out that solo 401(k) contribution, estimate in the same dividends and investment income you had for 2013 and you have a pretty good picture of what you will owe on your taxes. This can be done with TaxCaster as already mentioned. Don't forget your FICA/medicare taxes. It doesn't have to be accurate as you either get a refund or pay more when you file your 2014 tax return.

I don't see where a tax pro or CPA would be helpful to me, but I've been filing Scheudle C & SE for 30+ years because of a small amount of consulting income to go along with my W-2 income. It's pretty trivial.

Early retirees do not get any special changes in the tax laws for them, so the primer is still IRS Publication 17: http://www.irs.gov/pub/irs-pdf/p17.pdf
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Old 02-11-2014, 11:41 AM   #16
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Four equal estimated tax payments should be treated the same as normal withholding. It takes the timing out of the picture.

However, if for some reason you suddenly had more income late in the year (consulting pay, capital gains, IRA withdrawal etc.) you might want to use quarterly tax calculations to avoid a penalty for not covering those later taxes in four equal payments or withholding. In that case, the fact that you didn't pay all the taxes due in the first quarter could come back to haunt you.
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Old 02-11-2014, 11:54 AM   #17
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Four equal estimated tax payments should be treated the same as normal withholding. It takes the timing out of the picture.

However, if for some reason you suddenly had more income late in the year (consulting pay, capital gains, IRA withdrawal etc.) you might want to use quarterly tax calculations to avoid a penalty for not covering those later taxes in four equal payments or withholding. In that case, the fact that you didn't pay all the taxes due in the first quarter could come back to haunt you.
This only works if you are able to predict the total income for the year today and pay sufficient taxes owed. If you end up underpaying, you will owe penalties for earlier payments being too low.
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Old 02-11-2014, 03:06 PM   #18
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This only works if you are able to predict the total income for the year today and pay sufficient taxes owed. If you end up underpaying, you will owe penalties for earlier payments being too low.
Yes, but it's worth noting two things:

(a) The penalty is just interest for the underpaid portion, prorata. That rate is 3% today. Most of us model for at least a 3% return on investment anyway, and that makes any penalty more like a wash, because in the IRS' view you "should" have already remitted those funds but instead got to keep them longer.

(b) In amounts that might be realistic for the OP, the actual owed amount will be pretty low. Probably low enough to not justify the cost of a skilled planner on this basis alone, or at least in concert with the time value of the money that is imputed in (a).
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