Question on quarterly tax payments

[stepford]

Fairly basic question here: How accurately do I need to estimate my quarterly tax payments?

A bit more detail:
I FIRE'd at the start of this year with enough tax withheld from my final paychecks that no quarterly payments were required in 2016. I will commence my Megacorp pension in early 2017. My additional taxable income will be of two types: Predictable monthly interest and individual stock dividends, and less predictable mutual fund cap gains and dividends paid at the end of the year (plus possible Roth conversions which I will also do at the end of the year).

So my question is: Can I just withhold the tax on the "predictable" portion of my taxable income from my pension and make a single big payment at the end of the year corresponding to the tax on the "unpredictable" part? Even better would be avoid estimated taxes entirely and just pay the excess with my tax return the following April, but I think that would put me in the penalty box...

[Gill]

No, you can't just make an estimated payment at the end of the year without being subject to penalties. The payments are supposed to be made concurrently with the receipt of income. Many of us use the safe harbor rules which is to pay in an amount equal to the prior year's tax through withholding and/or estimated payments. If AGI exceeds $150K the safe harbor is 110% of the prior year's tax.
Bruce

[sengsational]

I think the spirit of the law would require you to estimate interest, dividend and cap gain distributions for the entire year, and use that for your equal payments. From what I've read here, the end-of-year Roth conversion tax could probably get added to a payment closer to when the conversion happened, and I think you'd be ok. At least that's what I did, and they didn't do/say anything.

More recently, I pulled from my 401k and they had mandatory withholding, so I don't need to do any estimated tax payments.

[pb4uski]

You might be ok. You can use the annualized installment method to calculate your tax liability as of 3/31/16, 5/31/16 and 8/31/16 based on your year-to-date income and if your YTD withholdings exceed the tax then you are all set. See Form 2210, Schedule AI.

Essentially, you calculate your tax as of each date and if you are overpaid then you are all set.

I do one each year because my tax liability arises in the last quarter when year end dividends are paid, I do my Roth conversion and raise cash for the coming year so I just do an estimated payment at the end of the year.

[Sue J]

You could adjust your withholding from your pension to cover what you expect to owe from the unpredictable part. That way it is withheld monthly throughout the year, making your income nice and steady.

DH's pension system allows us to make changes to withholding online and you can use the IRS set points for Married or Single or you can specify a dollar amount. They have a nice calculator for this so that you can preview changes before submitting.

Does your pension system have something like that?

[stepford]

I can adjust my pension withholding month by month and could easily bump it up in December to account for div and cap gain income. My question is whether I'm allowed to do this.

The real question is, what counts as year to date income? Do dividends and cap gains, which are distributed at the end of the year, count as income throughout the year or only on the date of distribution? Everything else I can easily predict and include the tax in the withholding from my pension throughout the year. The question is whether I can do as pb4uski says and treat this div + cap gain income as occurring on the distribution date, or need to do as MBMiner suggests and estimate it by using the previous year's income on those investments divided equally over the year.

Now I'm really confused.

[Bamaman]

I have social security and my defined pensions setup with withdrawals going to federal taxes. There are no state income tax on my pension or social security.

If I happen to make any 401K withdrawals, I'll have 20% setback for income taxes and 5% for the state.

I did get have $7K income in 3 months on ETF's last year, and had to pay up when I did my income taxes. I guess I should have been glad to have better than normal returns where I could pay'em.

[audreyh1]

Quote:

Originally Posted by stepford The question is, what counts as year to date income? Do dividends and cap gains, which are distributed at the end of the year, count as income throughout the year or only on the date of distribution? Everything else I can easily predict and include the tax in the withholding from my pension throughout the year. The question is whether I can do as pb4uski says and treat this div + cap gain income as occurring on the distribution date, or need to do as MBMiner suggests and estimate it by using the previous year's income on those investments divided equally over the year. Now I'm really confused.

Dividends and capital gains only count as income on the date of distribution.

Note that dividends are paid quarterly, so you do have to pay estimated taxes on those after each quarter in which they are received.

You can take a different approach with your capital gains distributions if those are paid in the 4th quarter. You don't owe estimated tax on them until after the 4th quarter - you owe on Jan 15th of the following year.

You could use the annualized income method of paying estimated taxes. It's a pain, but I occasionally do that if I expect the current year income to be less than the prior year, and I don't want to pay big chunks of estimated taxes up front when most of my income is realized in the 4th quarter. Most years I do the quarterly equal payments method based on prior year taxes because it's a no brainer compared to the annualized income method.

Right - as Braumeister mentions below, you can decide to have additional taxes withheld from your pension in December and that will be treated as if it were withheld equally throughout the year. That is a benefit available to those who have taxes withheld from pensions or IRA/401K withdrawals.

[pb4uski]

Quote:

Originally Posted by stepford I can adjust my pension withholding month by month and could easily bump it up in December to account for div and cap gain income. My question is whether I'm allowed to do this. The real question is, what counts as year to date income? Do dividends and cap gains, which are distributed at the end of the year, count as income throughout the year or only on the date of distribution? Everything else I can easily predict and include the tax in the withholding from my pension throughout the year. The question is whether I can do as pb4uski says and treat this div + cap gain income as occurring on the distribution date, or need to do as MBMiner suggests and estimate it by using the previous year's income on those investments divided equally over the year. Now I'm really confused.

For the purpose of the 2210AI it is easy... whatever your received (or was credited to your accounts) from 1/1/2016 to the relevant measurement date.

[braumeister]

Quote:

Originally Posted by stepford I can adjust my pension withholding month by month and could easily bump it up in December to account for div and cap gain income. My question is whether I'm allowed to do this.

Yes. AFAIK, anything withheld, even if it's in December, is deemed to have been paid evenly throughout the year. That's why some people who are subject to RMDs will take them in December and have taxes withheld. It frees them from having to make estimated quarterly payments.

[Animorph]

You can hit the "safe harbor" level by withholding 100% or 110% of 2015 taxes. No penalties for falling short in that case.

You can make evenly spread quarterly estimated tax payments plus withholding payments that come to at least 90% of your taxes actually owed for 2016. Or something close to that. That also avoids penalties.

Here's what I do. I know I'll be Roth converting to a specific tax bracket. So I know fairly closely what my taxes will be, barring extreme capital gains distributions. If I screw that up, I can just recharacterize some more of the Roth conversions to lower my taxes down to what was already paid.

If you are Roth converting you have pretty much 100% control of your taxes since you can recharacterize right up to your tax due date. Realistically it can take a few days to recharacterize, so do it well before then, but I do my taxes, figure out the total Roth conversion I need, recharacterize the rest, and then file my taxes when I have the recharacterization documentation ready.

[Souschef]

I use EFTPS- Electronic Federal Tax Payment System https://www.eftps.gov/eftps/direct/EftpsHome.page and the CA equivalent for my quarterly estimated tax payments. The payments are taken out of my checking account, and I have them scheduled a few days before the 15th of each quarter.

[youbet]

Quote:

Originally Posted by braumeister Yes. AFAIK, anything withheld, even if it's in December, is deemed to have been paid evenly throughout the year. That's why some people who are subject to RMDs will take them in December and have taxes withheld. It frees them from having to make estimated quarterly payments.

Yes exactly.

[Peter]

Good information posted above. But, as a practical matter, if your estimated payments don't match quarterly income, how would the IRS know? You're not required to break down non-employment income by quarter (although you can if you wish).

In the past, I've often topped up the last quarterly payment to adjust for zero penalty. As far as I can see, the only way the IRS would know is if you were audited.

Mind you, it's only ever been a relatively small adjustment; I daresay if you only made one giant payment for the 4th quarter, it might attract attention.

[audreyh1]

Quote:

Originally Posted by Peter Good information posted above. But, as a practical matter, if your estimated payments don't match quarterly income, how would the IRS know? You're not required to break down non-employment income by quarter (although you can if you wish). In the past, I've often topped up the last quarterly payment to adjust for zero penalty. As far as I can see, the only way the IRS would know is if you were audited. Mind you, it's only ever been a relatively small adjustment; I daresay if you only made one giant payment for the 4th quarter, it might attract attention.

You a required to file form 2210AI if your quarterly tax payments fall below 1/4 of your taxed owed, or 1/4 of the safe harbor quarter based on the prior year taxes, whichever is lower. That form discloses your income for each quarter. I suppose you could make up the numbers that go into that form so that you don't pay any penalty, and then hope you aren't audited.

[gerntz]

Quote:

Originally Posted by braumeister Yes. AFAIK, anything withheld, even if it's in December, is deemed to have been paid evenly throughout the year. That's why some people who are subject to RMDs will take them in December and have taxes withheld. It frees them from having to make estimated quarterly payments.

That's what we do even w/o RMD. Net, haven't paid a penny in income tax yet this year.

[audreyh1]

Hmmm - those of us retire who don't have pensions or aren't drawing from IRAs don't have this convenient option.

Maybe when we're forced into taking RMDs we'll pay all of our estimated taxes in Dec from our IRA withdrawal.

[brucethebroker]

I rely on my CPA's instructions for the coming year (and, usually, that is to pay the same as owed last year.)

[burch64]

I use EFTPS but I set it up to withdraw monthly from my checking account.
I calculate at the beginning of the year what my tax liability will be and devide by 12.

I can adjust along the way if anything changes. With EFTPS you can only set up 4 future payments at a time so I have to log on every 4 months to set up payments.

[audreyh1]

Quote:

Originally Posted by burch64 I use EFTPS but I set it up to withdraw monthly from my checking account. I calculate at the beginning of the year what my tax liability will be and devide by 12. I can adjust along the way if anything changes. With EFTPS you can only set up 4 future payments at a time so I have to log on every 4 months to set up payments.

Are you self employed and this is how you handle withholding? Otherwise IRS expects quarterly payments - -and on their odd quarterly schedule of Jan 15, April 15, June 15 and Sept 15.