Poll: Estimated Taxes

[Trooper]

Hi,

Since many of you are now retired on this forum, are you making estimated tax payments, and if so how are you determining your payments to avoid a potential underpayment penalty?

Also, if you are making payments, are you doing that by check or EFTPS?

I retired part-way through the year in 2016 and had sufficient wage withholding from w*rk not to worry about it, but I will have to make estimated payments in 2017.

Thanks.

[euro]

Quote:

Originally Posted by Trooper Hi, Since many of you are now retired on this forum, are you making estimated tax payments, and if so how are you determining your payments to avoid a potential underpayment penalty? Also, if you are making payments, are you doing that by check or EFTPS? I retired part-way through the year in 2016 and had sufficient wage withholding from w*rk not to worry about, it but I will have to make estimated payments in 2017. Thanks.

Depends on where your income is coming from - if it is a pension or IRA distribution then automatic withholding is usually an option. If it is just capital gains/dividends, you will likely need to make estimated payments since Uncle Sam wants to get paid in real time (i.e. taxes are owed on an ongoing basis), not next April. Quarterly payments is the practical compromise. That said, if you had any W2 income in 2016 you probably paid significant taxes for last year and as long as your total 2017 taxes owed are less than what you paid in 2016, you likely won't owe any penalties even if you don't make quarterly payments.
I'm in a very similar situation this year and no, I will NOT be making any estimated payments.

[RockyMtn]

I use this:

Income Tax Calculator - Tax-Rates.org

or TurboTax.

I use EFTPS for Fed and Aztaxes.gov for my state. Do this quarterly.

[Gotadimple]

If you use a tax program, you can make assumptions about income streams (and income tax deductions) and it will tell you what your estimated taxes are likely to be. Taxcaster is one of many internet based calculators. Or, you can set up a spreadsheet that emulates the Income Tax calculation and determine how much you need to pay in to avoid a penalty.

For early retirees who have just retired, estimated payments might not be needed. But after that partial year, you will probably need to make them. Some like to write checks, I prefer to set up estimated payments at EFTPS. I generally set up 3 payments (April, June, Sept), then see how what year-end distributions mean to the total tax bill due, before making the final payment in early January.

[Trooper]

Quote:

Originally Posted by euro Depends on where your income is coming from - if it is a pension or IRA distribution then automatic withholding is usually an option.

Good point on automatic withholding. Most of my income in 2017 will be from a tIRA => Roth conversion in December, from which I can have withholding taken. I'll be 59 1/2 by then, so no need to worry about early withdrawal penalty on the withholding.

I'll also have dividends and bond fund income throughout the year, so I may play it safe this year and take last year's liability and divide by 4.

[RunningBum]

It's varied over the years. I've done the safe harbor thing based on the previous year. I've estimated, and paid that amount or at bit more--not 90%, because if my estimate is low I could be penalized for not paying at least 90%. Last year I wound up paying $0 in taxes so I decided to pay a token amount this year. $100 a quarter I think. I probably don't need to and maybe I'll just make the first quarter payment and stop the others. I do use EFTPS.

[meierlde]

Note that once on SS you can have 25% of your benefit withheld as well.

[kaneohe]

Quote:

Originally Posted by Trooper Good point on automatic withholding. Most of my income in 2017 will be from a tIRA => Roth conversion in December, from which I can have withholding taken. I'll be 59 1/2 by then, so no need to worry about early withdrawal penalty on the withholding. .................................................. .........

Besides the EWP, another reason why folks often recommend paying taxes from other sources when doing Roth conversions is that you get to stuff more into the Roth which is more tax-favorable than other accounts.

[scrabbler1]

I have no taxes withheld during the year from any of my investment income. For my federal taxes, if I see that my tax bill will be over ~$600, then I pay part of it in the 4th quarter and the rest the following April. My federal tax bill rarely exceeds $1,100, especially after the ACA came out and I have a premium subsidy reducing the bill.


On the state side, however, I pay most of it (the state tax bill is about $1,500) through estimated taxes in late December if I plan to itemize my deductions so I don't have to wait another year. However, I have been bunching my deductions in some years since I ERed, so I have made 4th quarter payments in early January for the prior year and late December for the current year to "bunch" them into the same calendar year.


I had always been paying by paper check but recently I switched to online electronic payment. In the poll, I answered choices #3 and #6 but sometimes #4 also applies, just not for 2016.

[MBAustin]

Because of Roth conversions and capital gains distributions from taxable accounts, our taxable income has varied a lot the past few years. So I also widely vary the estimated tax payments, often with a large catch-up in January. Ended up with a small late-payment penalty this year as a result, but not enough to stress over.

I use IRS DirectPay.

[audreyh1]

Quote:

Originally Posted by Trooper Hi, Since many of you are now retired on this forum, are you making estimated tax payments, and if so how are you determining your payments to avoid a potential underpayment penalty? Also, if you are making payments, are you doing that by check or EFTPS? I retired part-way through the year in 2016 and had sufficient wage withholding from w*rk not to worry about it, but I will have to make estimated payments in 2017. Thanks.

I make estimated tax payments. I use EFTPS which I think is great.

I have three different methods I use:

Usually I use the four equal quarterly payments of 110% of the prior year taxes owed to avoid penalty.

But if I think the current year income is going to be quite a bit lower than the prior year, I use the Annualized Income method of estimating taxes based on actual income received each quarter. I have some spreadsheets that I have refined over their years to compute this. It's a lot of extra work, so I only do it if I think I'll be way overpaying taxes otherwise. I don't like to get back a large refund. This also requires filing Form 2210 with tax return.

I have also done the first 3 of 4 equal estimated payments, then in early January determined whether I am already above 90% of taxes owed. In which case I skip the Jan estimated payment. This is easier than the annualized income method.

[Alan]

I use TT to estimate how much I'm likely to be taxed in the coming year and use EFTPS to send in estimated payments. In early January I have a pretty accurate estimate of taxes and adjust the Jan 15 estimated tax payment to get close to what I expect.

[Trooper]

Quote:

Originally Posted by audreyh1 I make estimated tax payments. I use EFTPS which I think is great. I have three different methods I use: Usually I use the four equal quarterly payments of 110% of the prior year taxes owed to avoid penalty. But if I think the current year income is going to be quite a bit lower than the prior year, I use the Annualized Income method of estimating taxes based on actual income received each quarter. I have some spreadsheets that I have refined over their years to compute this. It's a lot of extra work, so I only do it if I think I'll be way overpaying taxes otherwise. I don't like to get back a large refund. This also requires filing Form 2210 with tax return. I have also done the first 3 of 4 equal estimated payments, then in early January determined whether I am already above 90% of taxes owed. In which case I skip the Jan estimated payment. This is easier than the annualized income method.

Very flexible approach! Thanks for sharing your process.

[HillCountry]

I estimate tax at least quarterly and pay via EFTPS.

My tax situation changes dramatically.

For 2016 my tax is about my take home pay. And my AGI for 2016 is less than my tax for 2015.

[stepford]

I'm just starting the estimated tax thing in this my 2nd year of RE. At present I'm using the withholding on my pension make estimated tax payments monthly, and base the amount on said pension plus whatever income I receive regularly from interest and dividends. Some additional income comes in a big lump in the 4th quarter (capital gains + Roth conversions) so I'll have to take a bit more care when that rolls around.

[athena53]

Quote:

Originally Posted by RunningBum Last year I wound up paying $0 in taxes so I decided to pay a token amount this year. $100 a quarter I think. I probably don't need to and maybe I'll just make the first quarter payment and stop the others.

The token amount was probably a good idea. I owed zero for 2015 so didn't make any estimated Federal payments during 2016. Due to far better investment results, I ended up owing a bundle and they hit me with a $50 penalty.

My taxable income is unpredictable since I get a lot of capital gain distributions near the end of the year. I doubt that 2017 will be as good as 2016 but if it is, I'll owe almost $7K more (between state and Federal) because DH died in 2016 and I'll be filing as Single for 2017. I'm making quarterly payments using the Safe Harbor provisions, but knowing I could end up owing more.

[rodi]

DH gets SS and we withhold both fed and state income tax. I have a small inherited IRA that I must take RMD withdrawals... I take them out quarterly and have federal and state tax withheld. Additionally, we pay full freight for our healthcare premiums, and get the ACA tax credit back as a refund at tax filing time. I also have micro pensions and have a tiny amount of tax taken out on those.

This is all more than enough to cover the taxes we owe on rental income and from our taxable accounts.

[Trooper]

Quote:

Originally Posted by athena53 I owed zero for 2015 so didn't make any estimated Federal payments during 2016. Due to far better investment results, I ended up owing a bundle and they hit me with a $50 penalty.

Wondering why you were hit with a penalty...wouldn't you have been OK under the Safe Harbor?

[audreyh1]

Quote:

Originally Posted by athena53 The token amount was probably a good idea. I owed zero for 2015 so didn't make any estimated Federal payments during 2016. Due to far better investment results, I ended up owing a bundle and they hit me with a $50 penalty. My taxable income is unpredictable since I get a lot of capital gain distributions near the end of the year. I doubt that 2017 will be as good as 2016 but if it is, I'll owe almost $7K more (between state and Federal) because DH died in 2016 and I'll be filing as Single for 2017. I'm making quarterly payments using the Safe Harbor provisions, but knowing I could end up owing more.

Whyt didn't the safe harbor rules protect you?

[athena53]

Quote:

Originally Posted by audreyh1 Whyt didn't the safe harbor rules protect you?

No idea. I just looked up the form and the $50 was on Line 79, "Estimated Tax Penalty". I skimmed the IRS instructions and you're right- from what I could tell, if I had no tax liability in 2015 there should be no penalty for not making estimated payments for 2016. I'll need to look at it more closely (nearly every section on estimated payments has tougher standards for higher-income households) but TurboTax may have gotten it wrong.