Tax question about underpayment of estimated taxes

[Sirka]

Withholding is treated differently than estimated taxes. W/H is considered to have been paid evenly throughout the yr no matter when you pay it.....unless you want to treat it as when paid. Don't ask me why..............

that's cool, but:
There is one catch to avoid. The tax code says withheld tax payments are not considered made equally on the estimated tax due dates during the year when the taxpayer determines the dates on which the money actually was withheld.
Taxes: Estimated Tax Strategies for Retirees

 

[scrinch]

I'm sure audreyh1 is right about Form 2210, but...
the IRS hit me for a missed quarterly payment 5-6 years ago. I had earned the money through consulting early that year, but didn't get paid until July. So I didn't make the quarterly payment until Q3...the quarter in which I got paid. They sent me a letter about 6 months after I filed that year's taxes telling me I owed a penalty for slow payment of my taxes. In response, I began the process of justifying my lack of Q2 payment but quickly got tangled up in IRS forms, worksheets, and sub-worksheets. After spending a couple of afternoons struggling to understand what was needed, and trying to find the information needed to fill out the worksheets, I just decided to pay the $250 penalty and be done with it. I'm convinced that I was in the right...that I didn't need to pay estimated taxes until after I had received my income, but demonstrating that to the IRS was costing more effort than I was willing to put out.

So if I were you I would send in an estimated payment covering whatever tax you think you will owe from those transactions using the September voucher. You might not need to send it now, but it may be easier than doing the work needed to justify not doing so. YMMV

 

[gerntz]

that's cool, but:
There is one catch to avoid. The tax code says withheld tax payments are not considered made equally on the estimated tax due dates during the year when the taxpayer determines the dates on which the money actually was withheld.
Taxes: Estimated Tax Strategies for Retirees

Thanks. So this applies if you have multiple IRA withdrawals/deduction spaced over the year vs. just withdrawing at one time of the year.

 

[audreyh1]

I'm sure audreyh1 is right about Form 2210, but...
the IRS hit me for a missed quarterly payment 5-6 years ago. I had earned the money through consulting early that year, but didn't get paid until July. So I didn't make the quarterly payment until Q3...the quarter in which I got paid. They sent me a letter about 6 months after I filed that year's taxes telling me I owed a penalty for slow payment of my taxes. In response, I began the process of justifying my lack of Q2 payment but quickly got tangled up in IRS forms, worksheets, and sub-worksheets. After spending a couple of afternoons struggling to understand what was needed, and trying to find the information needed to fill out the worksheets, I just decided to pay the $250 penalty and be done with it. I'm convinced that I was in the right...that I didn't need to pay estimated taxes until after I had received my income, but demonstrating that to the IRS was costing more effort than I was willing to put out.

So if I were you I would send in an estimated payment covering whatever tax you think you will owe from those transactions using the September voucher. You might not need to send it now, but it may be easier than doing the work needed to justify not doing so. YMMV

Did you file a form 2210 when you filed your taxes for that year? It would probably have kept the IRS off your back. That's how you demonstrate when you received the income and why you didn't owe earlier payments because you didn't have earlier income.

If you don't pay your estimated taxes in 4 equal installments that meet the safe harbor criteria from the prior year, or 1/4 of the tax you end up owing, you must file form 2210 with your 1040 to show what you actually owed when.

Not filing it was perhaps how the IRS "noticed" you were "slow to pay"?

 

[kaneohe]

that's cool, but:
There is one catch to avoid. The tax code says withheld tax payments are not considered made equally on the estimated tax due dates during the year when the taxpayer determines the dates on which the money actually was withheld.
Taxes: Estimated Tax Strategies for Retirees

Sirka..........thanks for the link. I will have to appeal to a higher power for a proper response. My initial literal reaction is that it says "not considered made equally on the ESTIMATED TAX due dates". It does not say 'not "considered made equally THROUGHOUT THE YEAR." ' which is the normal claim.

If both of those statements are true, the cumulative estimated payments should be 25%/50/75/100% on the payment dates of 15APR/Jun/Sep/JAN
but the "actual" payments(if considered to be paid equally thru the yr) will be 29/46/71/100(last pymnt 2 wks early). The EST tax due dates are
not at calendar quarters, but 2 wks later for Apr/Jan and 2 wks early for Jun/Sept.
It may be that the larger effective payment in Apr. and the earlier effective
payment for Q4 will cancel out the shortfall in Jun/Sept. and so in practice be equivalent.

I will see what Alan S. says.

 

[kaneohe]

In Part 2 of Form 2210 for figuring est. tax penalty there is an option D:

D) Your penalty is lower when figured by treating the federal income tax withheld from your income as paid on the dates it was
actually withheld, instead of in equal amounts on the payment due dates. You must figure your penalty and file Form 2210.
************************************************************

It looks to me that if you elect option D), the income tax withheld will be treated as withheld on the dates it was actually withheld but if you do not
elect option D, the assumption will be that it was withheld in equal amounts on the payment due dates. If you withheld late in the year which is the suggested strategy, you would of course not make the election.

The simplified method in Form 2210 does not ask when the withholding was done which is consistent w/ the idea that the timing does not matter.

 

[kaneohe]

If you have an IRA, there is a way to avoid quarterly payments & just pay once at the end of the year.

Estimate your taxes. Make an IRA withdrawal and designate the withdrawal to go to Fed/state tax payments. You can do this at any time of the year. Many brokerages have forms that let you say how much goes where.

Then, within 60 days of the withdrawal & before you file your tax return, say oops, I changed my mind on withdrawal and redeposit into the IRA the amount withdrawn with other money sources. This redeposit can be shown on the tax return.

Here's what one pro thinks of that idea:
Fairmark Forum :: Retirement Savings and Benefits :: IRA withholding for Taxes

I wouldn't touch this idea. The IRS has had some success going after people who abuse the 60-day rollover rule where it was apparent that it was part of a plan to gain use of the money for a period of time. They've called it a loan, which is a prohibited transaction, and the courts have agreed.

Kaye Thomas
Fairmark.com

 

[scrinch]

Did you file a form 2210 when you filed your taxes for that year? It would probably have kept the IRS off your back. That's how you demonstrate when you received the income and why you didn't owe earlier payments because you didn't have earlier income.

If you don't pay your estimated taxes in 4 equal installments that meet the safe harbor criteria from the prior year, or 1/4 of the tax you end up owing, you must file form 2210 with your 1040 to show what you actually owed when.

Not filing it was perhaps how the IRS "noticed" you were "slow to pay"?

No, I'd never heard of a Form 2210 at that point. I was new to 1099 income, having just left behind a 22-yr career of tax withholding and W-2's. It sounds like not filing that form was my problem. I was shocked at how difficult they could make explaining the simple issue of how much and when I got paid (after the fact). I guess filling out the 2210 in April would have been a lot easier.

 

[kaneohe]

Thanks. So this applies if you have multiple IRA withdrawals/deduction spaced over the year vs. just withdrawing at one time of the year.

I don't think this matters..........it just depends whether you make that election
on Part 2 D of form 2210 discussed previously here. Don't make the election and you should be fine.

 

[gerntz]

Here's what one pro thinks of that idea:
Fairmark Forum :: Retirement Savings and Benefits :: IRA withholding for Taxes

I wouldn't touch this idea. The IRS has had some success going after people who abuse the 60-day rollover rule where it was apparent that it was part of a plan to gain use of the money for a period of time. They've called it a loan, which is a prohibited transaction, and the courts have agreed.

Kaye Thomas
Fairmark.com

Thanks. But my IRA holder, Schwab, won't let you put the "whole" amount towards withholding. Perhaps that gets around the issue. Don't know. Regardless, I'm doing this with my CPA's blessing.

 

[kaneohe]

If you have an IRA, there is a way to avoid quarterly payments & just pay once at the end of the year.

Estimate your taxes. Make an IRA withdrawal and designate the withdrawal to go to Fed/state tax payments. You can do this at any time of the year. Many brokerages have forms that let you say how much goes where.

Then, within 60 days of the withdrawal & before you file your tax return, say oops, I changed my mind on withdrawal and redeposit into the IRA the amount withdrawn with other money sources. This redeposit can be shown on the tax return.

See this 11/21 post by Kaye Thomas, founder of fairmark.com. This is the first time I've seen contrary opinion to the late withholding being ok to consider as being taken evenly throughout the year.
Fairmark Forum :: Other Tax Questions :: Estimated Tax Payments

Re: Estimated Tax Payments
Posted by: Kaye Thomas, November 21, 2013 09:10AM
Good plan. quoting the Internal Revenue Code is sometimes effective, but they always give in when they hear my name.

Just for fun, though, I took a look at the law and found that the statutory rule isn't a broad as I suggested. It applies to tax withheld on wages.

[www.law.cornell.edu]

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

 

[Animorph]

One key might be if the IRS has the withholding timing info for IRA withdrawals or if it is just a single number being reported to them. They obviously have the quarterly estimated tax payment timing info.

Worst case, barring the late payment scheme, you have to do the quarterly tax calculations that might have been avoided by using withholding.

 

[kaneohe]

One key might be if the IRS has the withholding timing info for IRA withdrawals or if it is just a single number being reported to them. They obviously have the quarterly estimated tax payment timing info.

Worst case, barring the late payment scheme, you have to do the quarterly tax calculations that might have been avoided by using withholding.

I suspect (w/o actual knowledge) that they don't so the risk would be being caught by chance and being audited.......kind of like in the pre-covered days of CGs. I imagine you could have put anything down for basis and would only be caught in an audit . I think I'd prefer to walk on the safe side . KT's response was the only one I've seen taking this stance but I guess he knows more than the ordinary mortal.

 

[Animorph]

I suspect (w/o actual knowledge) that they don't so the risk would be being caught by chance and being audited.......kind of like in the pre-covered days of CGs. I imagine you could have put anything down for basis and would only be caught in an audit . I think I'd prefer to walk on the safe side . KT's response was the only one I've seen taking this stance but I guess he knows more than the ordinary mortal.

I usually lean in the same safe direction. But I'll be doing whatever Turbo Tax says.

 

[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...

 

[kaneohe]

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]

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]

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]

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]

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]

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]

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]

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.