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Tax question about underpayment of estimated taxes
Old 11-18-2013, 11:29 AM   #1
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Tax question about underpayment of estimated taxes

For years and years my income has been pretty steady, but in 2012 I paid quite a bit of tax and therefore decided not to use the safe harbor of paying estimated taxes equal to prior year, but instead estimating what I would owe in 2013 and making payments based on this. I made these quarterly payments on April 8 and Jun 5, 2013. It seems that this covered my likely 2013 tax, so I skipped the September payment.

Then in late October I did some trades which raised my income beyond what I had estimated. Should I try to make a payment now, using the September chit, or just wait until the January 2014 payment and make up the difference? I don't like to way overpay, because I file by mail, and it has seemed that the government takes its sweet time returning my overpayments. I do not have any withholding.

Ideas?

Ha
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Old 11-18-2013, 11:37 AM   #2
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My mother has to make quarterly payments. However, she often forgot and mailed in 2 or 3 at the end of the year, one time even on Feb of the next year. Never got any hassle from the IRS.
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Old 11-18-2013, 11:40 AM   #3
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Quote:
Originally Posted by haha View Post
Then in late October I did some trades which raised my income beyond what I had estimated. Should I try to make a payment now, using the September chit, or just wait until the January 2014 payment and make up the difference? I don't like to way overpay, because I file by mail, and it has seemed that the government takes its sweet time returning my overpayments. I do not have any withholding.

Ideas?

Ha
Timing is important if the IRS decides to go after you. Since you didn't realize the income until after the September estimated payment, there is no justification in their not accepting the additional payment in January. Somewhere this is in the IRS code but I'm too lazy to look it up for you.
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Old 11-18-2013, 11:41 AM   #4
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The worst that can happen is that they will fine you and I think that is only if you have goofed two years in a row. It isn't much and they don't make a big deal out of it (I guess this happens a lot). If it was me, I'd just continue as planned and pay the fine if/when they ask you for it sometime next year.
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Old 11-18-2013, 11:43 AM   #5
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I usually do send in 4 payments. Sometimes I send late. It will matter if you have a penalty. If you send in the third chit late, it is better than not sending anything.

I usually overpay because of self employment. If they owe me a bit, I usually split that amount and take a refund for one-half. Rest goes towards next year's pot.
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Old 11-18-2013, 11:43 AM   #6
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Timing is important if the IRS decides to go after you. Since you didn't realize the income until after the September estimated payment, there is no justification in their not accepting the additional payment in January. Somewhere this is in the IRS code but I'm too lazy to look it up for you.
Thanks. I didn't want people to do my work for me, just to make suggestions.

Consensus that I should be fine.

Ha
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Old 11-18-2013, 11:44 AM   #7
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You are should be OK (if your first two payments exceeded your likely total tax - which I think is what you said) - you just need to switch to the annualized income method, and your January estimated payment will catch you up.

Your new income in October - estimated taxes aren't due on that until Jan 2014.

By January 2014 you need to pay 90% of the taxes owed on your 2013 income.

In September of 2013, if you had paid at least 67.5% of the taxes owed on your (2013 income through August)x1.5, you are still OK. This is the "annualized method" used for tax payments for Sept.

You will probably have to file form 2210 with your 1040 to avoid the penalty. Tax software will take care of this OK, but you will need to calculate your income in each tax quarter - thru March, thru May, and thru August for entry into that form.

[I now know this stuff almost like the back of my hand]
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Old 11-18-2013, 12:04 PM   #8
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Last year or the year before I did a pretty big Roth conversion at the end of the year, and made a corresponding estimated tax payment in January. Turbo Tax flagged me as underpaying throughout the year, but took me to some form where I filled out my income and deductions for each quarter, and then it came out fine. I don't know if that was a worksheet or a form that actually got filed. But yes, I think you'll be fine with a January payment from my experience.

Somebody told me years ago that once you start making estimated quarterly payments the IRS expects them every quarter, but I've never seen anything to that effect. Still, I've always made at least a small payment each quarter.
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Old 11-18-2013, 12:06 PM   #9
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Your new income in October - estimated taxes aren't due on that until Jan 2014.

In January 2014 you need to pay 90% of the taxes owed on your 2014 income.
Audrey................did you mean......In Jan 2014 you need to pay 90% of the taxes owed on your 2013 Q4 income?

or perhaps based on your later post:

By Jan 2014, you need to have paid 90% of the taxes owed on your 2013 total income . This includes
estimated taxes paid in prior quarters. ( I seem to recall that in the past you had a way of estimating the individual quarters est. tax based on that quarter's income).
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Old 11-18-2013, 12:09 PM   #10
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Quote:
Originally Posted by RunningBum View Post
Last year or the year before I did a pretty big Roth conversion at the end of the year, and made a corresponding estimated tax payment in January. Turbo Tax flagged me as underpaying throughout the year, but took me to some form where I filled out my income and deductions for each quarter, and then it came out fine. I don't know if that was a worksheet or a form that actually got filed. But yes, I think you'll be fine with a January payment from my experience.

Somebody told me years ago that once you start making estimated quarterly payments the IRS expects them every quarter, but I've never seen anything to that effect. Still, I've always made at least a small payment each quarter.
Form 2210

I've skipped some quarters of estimated tax payments if it turned out I didn't owe any more using the Annualized Income Method. This is not an unusual situation, so I don't believe the IRS expects a payment every quarter.
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Old 11-18-2013, 12:12 PM   #11
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Audrey................did you mean......In Jan 2014 you need to pay 90% of the taxes owed on your 2013 Q4 income?
I had already caught and fixed that, thanks. - Entire 2013 income, (not just Q4).
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Old 11-18-2013, 12:17 PM   #12
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Several times I've under-estimated amounts for the first three payments, and made up with a big check early the following January. So far no problem. I suspect that if I was audited, the inspector might notice that estimated tax payments didn't match income on a quarter by quarter basis. But I think the IRS has more rewarding things to do that chase after people who appear to have paid the full amount on time.
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Old 11-18-2013, 12:19 PM   #13
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Quote:
Originally Posted by haha View Post
For years and years my income has been pretty steady, but in 2012 I paid quite a bit of tax and therefore decided not to use the safe harbor of paying estimated taxes equal to prior year, but instead estimating what I would owe in 2013 and making payments based on this. I made these quarterly payments on April 8 and Jun 5, 2013. It seems that this covered my likely 2013 tax, so I skipped the September payment.

Then in late October I did some trades which raised my income beyond what I had estimated. Should I try to make a payment now, using the September chit, or just wait until the January 2014 payment and make up the difference? I don't like to way overpay, because I file by mail, and it has seemed that the government takes its sweet time returning my overpayments. I do not have any withholding.

Ideas?

Ha
I would do it now and top up your YTD estimated taxes to what you think you'll owe factoring in those trades. That way the timing of your payments would align with your income and I think it is a more defensible position than waiting until January unless you have some unrealized losses that your expect to harvest between now and year end.
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Old 11-18-2013, 12:26 PM   #14
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I would do it now and top up your YTD estimated taxes to what you think you'll owe factoring in those trades. That way the timing of your payments would align with your income and I think it is a more defensible position than waiting until January unless you have some unrealized losses that your expect to harvest between now and year end.
No - for income received after after 8/31/13, he doesn't own any taxes until January, as long as he had paid enough total estimated taxes in September for income thru August. See my post above which spells out the criteria for what is due in September.
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Old 11-18-2013, 12:47 PM   #15
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If your state has income taxes, you cannot deduct federal taxes paid unless you paid them in 2013. So do not wait till January if you want to deduct from your state income tax form. Also, there is no penalty if you pay 110% of last year's federal tax in the event of a large income increase from one year to the next.
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Old 11-18-2013, 12:54 PM   #16
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or perhaps based on your later post:

By Jan 2014, you need to have paid 90% of the taxes owed on your 2013 total income . This includes estimated taxes paid in prior quarters. ( I seem to recall that in the past you had a way of estimating the individual quarters est. tax based on that quarter's income).

I apologize for being nit-picky about the wording but to me:
"In January 2014 you need to pay 90% of the taxes owed on your 2013 income." sounds like the Jan.2014
payment needs to be this amount .
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Old 11-18-2013, 01:16 PM   #17
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Worst case you have to figure out your 2013 taxes owed and paid by quarter. You should balance out OK. There are simple penalties for underpayment you (or Turbo Tax) can calculate when you do your taxes. TT might not give you the option to ignore them. My state taxes have the same quarterly option. I think I've paid an extra $20 once.
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Old 11-18-2013, 01:21 PM   #18
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Quote:
Originally Posted by kaneohe View Post
or perhaps based on your later post:

By Jan 2014, you need to have paid 90% of the taxes owed on your 2013 total income . This includes estimated taxes paid in prior quarters. ( I seem to recall that in the past you had a way of estimating the individual quarters est. tax based on that quarter's income).

I apologize for being nit-picky about the wording but to me:
"In January 2014 you need to pay 90% of the taxes owed on your 2013 income." sounds like the Jan.2014
payment needs to be this amount .
Right:

By Jan 2014 you need to have paid 90% of the taxes owed on your 2013 total income. So it will be the difference between 90% of the taxes owed and what you have already paid in estimated taxes for 2013.
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Old 11-18-2013, 01:26 PM   #19
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No - for income received after after 8/31/13, he doesn't own any taxes until January, as long as he had paid enough total estimated taxes in September for income thru August. See my post above which spells out the criteria for what is due in September.
Audreyh1's excellent advice is straight out of IRS publication 505, page 28. Any payment sent in between now and 1/15/2014 will be treated as a payment on fourth quarter, 2013 income.

http://www.irs.gov/pub/irs-pdf/p505.pdf
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Old 11-18-2013, 01:59 PM   #20
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Since I ERed 5 years ago, most of my income comes from monthly dividends which are roughly equal from month to month. But I do have some income spikes in June and December from irregular cap gain distributions and other spikes.

These spikes, along with the unequal number of months in each estimated tax payment period (3, 2, 3, and 4, from Jan to Dec), greatly skew my income distribution toward the end of the year. With my total federal tax bill under $2,000, I pay about 1/3 of my estimated (federal) taxes in September, another 1/3 in January, and the rest in the following April, making sure I owe much less than $1,000 in April to keep me in that safe harbor.

The IRS has never bothered me, as I am probably flying under therir radar with such small amounts of estimated taxes paid. For the state, I pay most of them in the 4th quarter so I can do that bunching thing I elaborate on just below this, also staying under the radar.

SFtreat makes a good point about paying 4th quarter estimated state income taxes before 12/31 so you can deduct them on that year's return instead of waiting another year. I learned that the hard way back in the 1990s. However, you can also use that year choice to "bunch" your itemized deductions, paying in January for the prior year then in December for the current year.
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