Tax question about underpayment of estimated taxes

[Sirka]

[QUOTE=RunningBum;1381371
Somebody told me years ago that once you start making estimated quarterly payments the IRS expects them every quarter,..[/QUOTE]
+1
I am making estimated quarterly payments to keep IRS & State Tax Board computers 'happy'. They could start sending 'late notices'

Even a small payment is better then none.

[gerntz]

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& before you file your tax return, say oops, I changed my mind on withdrawal and redeposit into the IRA the amount withdrawn with other money sources.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.

[Sirka]

Quote:

Originally Posted by gerntz 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& before you file your tax return, say oops, I changed my mind on withdrawal and redeposit into the IRA the amount withdrawn with other money sources.

Good to know, but very complicated (I do not like sending forms). It's easier to use EFTPS to pay the Estimate taxes.

[RunningBum]

Quote:

Originally Posted by gerntz 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& before you file your tax return, say oops, I changed my mind on withdrawal and redeposit into the IRA the amount withdrawn with other money sources.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.

I don't see how this gets around the requirement to pay quarterly if you have income earlier in the year.

[kaneohe]

Quote:

Originally Posted by RunningBum I don't see how this gets around the requirement to pay quarterly if you have income earlier in the year.

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..............

[Sirka]

Quote:

Originally Posted by kaneohe 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]

Quote:

Originally Posted by Sirka 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]

Quote:

Originally Posted by 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

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]

Quote:

Originally Posted by Sirka 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]

Quote:

Originally Posted by gerntz 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]

Quote:

Originally Posted by audreyh1 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]

Quote:

Originally Posted by gerntz 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]

Quote:

Originally Posted by kaneohe 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]

Quote:

Originally Posted by gerntz 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]

Quote:

Originally Posted by 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.

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]

Quote:

Originally Posted by kaneohe 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...