Tax question about underpayment of estimated taxes

[kaneohe]

Quote:

Originally Posted by skyline I never make estimated tax payments, and never understood why so many people bother...The penalty computed at tax time never seems high enough to make it worth my time and effort. In the past 4 years, my penalty has ranged between 1% to 3% of what I owed. I'm assuming it can vary by quite a bit, but for someone with mainly dividend and capital gains income, it seems like it's not worth dealing with. For me, I assume that's a worst-case scenario of about 6% annualized - on average I think I actually make a small profit by investing the money and paying the penalty in April...

Current IRS interest rate is 3% or something close. I'd sure like to know how you can do that SAFELY these days

[gerntz]

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Originally Posted by kaneohe I'm not aware of any rule that would allow you to treat income tax withholding from other forms of income as being paid equally in each quarter. Income paid from an IRA or other retirement plan is not wage income, and it appears to me that for purposes of determining any penalty for underpayment of estimated tax, withholding on such income has to be treated as paid when it was withheld. Kaye Thomas Fairmark.com

Not sure if this is relevant, but our income is not equal throughout the year & in fact is backend loaded. Net, not sure I could accurately estimate taxes for the year the previous Winter.

[kaneohe]

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Originally Posted by gerntz Not sure if this is relevant, but our income is not equal throughout the year & in fact is backend loaded. Net, not sure I could accurately estimate taxes for the year the previous Winter.

Then you are the ideal candidate for Audrey's 2210 Sch AI. Kind of like doing your taxes 4x at one sitting so if you like doing taxes, you'll be delighted

[audreyh1]

Quote:

Originally Posted by gerntz Not sure if this is relevant, but our income is not equal throughout the year & in fact is backend loaded. Net, not sure I could accurately estimate taxes for the year the previous Winter.

You can use the prior year's tax and pay based on that. Then you will be "safe" from penalty no matter what the current year's taxes are. See "safe harbor rules" earlier in this thread.

[meierlde]

Quote:

Originally Posted by gerntz Not sure if this is relevant, but our income is not equal throughout the year & in fact is backend loaded. Net, not sure I could accurately estimate taxes for the year the previous Winter.

If you go thru form 2210 you find that if you owe less that 1000 there is no penalty or if you have had withheld and paid 90% there is no penalty. I suspect that you could also do that with the last payment due Jan 15. If you pay to the 90% level no penalty will be due.

[skyline]

Quote:

Originally Posted by kaneohe Current IRS interest rate is 3% or something close. I'd sure like to know how you can do that SAFELY these days

Certainly not safely, more like typically. However, at least in my situation, my tax bill in total is usually around $5K. 3% of that is only $150, so if I sometimes don't do better by holding onto the money, it doesn't really have any material impact on anything. So no, not safely, but it's a small enough amount that safety is not a big concern.

That said, even if the amount were more significant, a 3% penalty is really small enough that I know I'm not going to be badly burned, and that more often than not, I'll end up ahead by investing the difference. I don't think this represents any more risk than anyone's general equity holdings...

[kaneohe]

Quote:

Originally Posted by skyline Certainly not safely, more like typically. However, at least in my situation, my tax bill in total is usually around $5K. 3% of that is only $150, so if I sometimes don't do better by holding onto the money, it doesn't really have any material impact on anything. So no, not safely, but it's a small enough amount that safety is not a big concern. That said, even if the amount were more significant, a 3% penalty is really small enough that I know I'm not going to be badly burned, and that more often than not, I'll end up ahead by investing the difference. I don't think this represents any more risk than anyone's general equity holdings...

ok, thanks, I understand now.
.........and if it makes you feel any better, it is likely that the penalty is not the full $150 but perhaps just 5/8 or so of that (est 90+) since only 1/4 of the payment is due each quarter and so only 1/4 is subjected to a full yrs interest.
Other installments are subjected to roughly 1,2, and 3 quarters of a yr interest.
You'd have to use 2210 to figure it exactly.

[RunningBum]

I got burned in college when I was a contract employee and ignorantly didn't pay estimated taxes. I knew the tax would be due so I set aside the money but interest rates were very high in the early 80s so the penalty was pretty large for a college kid. Since then I've been paranoid about that penalty, not realizing the rate is so low these days. I agree it's not that big of a deal, though making quarterly payments is as easy as paying any bill online.

I'd make a point about form 2210 being something to avoid, but I had to fill it out anyway to avoid penalty for uneven payments due to most of my income coming late in the year.

[cranberryjoe]

Last week I used Turbotax to help me with year end tax lost harvesting. But in doing so I discovered I would be getting a huge refund in April, about twice as large as my 4th quarter estimated tax payment due in January.

2013 was the first year I've ever done estimated tax payments. I have some monthly investment income, and Turbotax last year calculated estimated taxes to be made in 4 equal payments. I have w2 withholdings in 2013 as well as the quarterly estimated taxes. It appears that Turbotax significantly over-estimated. So since I've already overpaid my taxes for the year, can I just skip the 4th quarter estimated tax payment, or do I need to make some minimal payment to satisfy the IRS, only to have it refunded when I file for the year?

[audreyh1]

Quote:

Originally Posted by cranberryjoe Last week I used Turbotax to help me with year end tax lost harvesting. But in doing so I discovered I would be getting a huge refund in April, about twice as large as my 4th quarter estimated tax payment due in January. 2013 was the first year I've ever done estimated tax payments. I have some monthly investment income, and Turbotax last year calculated estimated taxes to be made in 4 equal payments. I have w2 withholdings in 2013 as well as the quarterly estimated taxes. It appears that Turbotax significantly over-estimated. So since I've already overpaid my taxes for the year, can I just skip the 4th quarter estimated tax payment, or do I need to make some minimal payment to satisfy the IRS, only to have it refunded when I file for the year?

If you have already paid 100% of what you owe by Jan 15, you should be OK.

You might end up having to fill out and file form 2210 when you file your taxes. This may be an annoying exercise, but worth it to avoid any future letters and issues. But it could be that since you already paid everything you owed in the first 3 quarters this ends up not being required. It's hard to guess.

Did turbotax use your 2012 taxes to calculate your 4 estimated payments? That would be the safe harbor.

BTW - I just apply any excess paid (i.e. a refund) to the next year's estimated tax payments.

[jebmke]

Quote:

Originally Posted by audreyh1 Did turbotax use your 2012 taxes to calculate your 4 estimated payments? That would be the safe harbor.

Yes, unless income is dropping by a lot, safe harbor amount is simpler than doing a lot of work to calculate ES. Opportunity cost is low if you overpay with rates these days.

I did a ROTH conversion this year so the safe harbor number for '14 will be much higher. May have to do the calcs this year.

[Animorph]

Those watching AGI and itemizing with a state tax deduction (me) will want to avoid a state tax refund, which goes into AGI. Any state refund will directly cut my Roth conversion amount.

[jebmke]

Quote:

Originally Posted by Animorph Those watching AGI and itemizing with a state tax deduction (me) will want to avoid a state tax refund, which goes into AGI. Any state refund will directly cut my Roth conversion amount.

Yes, although depending on where you are in the brackets, it could be just a timing issue since you lowered your AGI the prior year so any ROTH conversion then could be higher.

[gerntz]

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Originally Posted by Animorph Those watching AGI and itemizing with a state tax deduction (me) will want to avoid a state tax refund, which goes into AGI. Any state refund will directly cut my Roth conversion amount.

You can cover that with greater charity gifting.

[scrabbler1]

Quote:

Originally Posted by Animorph Those watching AGI and itemizing with a state tax deduction (me) will want to avoid a state tax refund, which goes into AGI. Any state refund will directly cut my Roth conversion amount.

A state income tax refund, or in my case a state property tax rebate, will count in the following year's AGI which can affect the federal subsidy for the ACA.

[Z3Dreamer]

The IRS's estimated tax rules, complicated exceptions to them and taxpayers fluctuating incomes keep CPA's busy. Large corporations with a multi-state presence, large book to tax differences and fluctuating income are even worse.