Taxes - safe harbor question

[SecondCor521]

I am trying to make sure my father meets the safe harbor provision for taxes this year. He is 81 years old.

My Mom died last year, so this year my Dad will file single instead of MFJ. As a result of this and other factors, his taxes due this year will be about 25% higher than last year. He has a relatively high income. As a result of those facts, I think the easiest safe harbor rule to meet is to send in 110% of his prior year (2016) taxes.

He took his RMD for this year already and withheld taxes then but was unfortunately about $2K short of the 110% amount.

What I'd like to do is just have him send in an estimated tax payment of $2K in about December of this year.

1. Will that work to meet the safe harbor?
2. Does he need to send it in in the same tax quarter as his RMD (possibly too late for this), or is December OK?

If that doesn't work, I suppose I can have him do an additional $2K IRA withdrawal and just send all of it to the IRS, since that counts for withholding and I know if he does it that way it will work.

3. Will Vanguard do an IRA withdrawal where 100% of the withdrawal goes to the IRS?

Thanks!

 

[Tom57]

Answer to #3

I don't know the answer for 1 & 2 but Vanguard allows up to a 99% tax witholding rate. I did this 2 weeks ago at Vanguard and when I tried a 100% witholding rate their website clearly stated 99% was the highest % allowed. The 99% rate worked fine.

 

[kaneohe]

I don't what the rules are when you have a filing status change (MFJ to single).
One link suggests that you can ask for a waiver for that year:
'You can file form 2210 to request a waiver under certain circumstances, for instance if your filing status changed from single to married or vice versa.......................... Form 2210 can also be used:

If you are retired or disabled and you can prove that your underpayment was due to some other reason than willful neglect, you may attach a statement with your tax return explaining the reason for your underpayment and requesting that the penalty be waived."

Am I Going to Be Hit With an Estimated Tax Payments Penalty?

You are correct that w/h is the sure way to do it since it is not sensitive to when you do it. Paying estimated taxes is time sensitive and should be paid ASAP to minimize the penalty. Take comfort that the max penalty will be 3% of the amount not paid.....for 2K that would be $60 and likely half of that since it should have been paid quarterly and not at the beginning of the yr.

 

[Texas Proud]

I don't what the rules are when you have a filing status change (MFJ to single).
One link suggests that you can ask for a waiver for that year:
'You can file form 2210 to request a waiver under certain circumstances, for instance if your filing status changed from single to married or vice versa.......................... Form 2210 can also be used:

If you are retired or disabled and you can prove that your underpayment was due to some other reason than willful neglect, you may attach a statement with your tax return explaining the reason for your underpayment and requesting that the penalty be waived."

Am I Going to Be Hit With an Estimated Tax Payments Penalty?

You are correct that w/h is the sure way to do it since it is not sensitive to when you do it. Paying estimated taxes is time sensitive and should be paid ASAP to minimize the penalty. Take comfort that the max penalty will be 3% of the amount not paid.....for 2K that would be $60 and likely half of that since it should have been paid quarterly and not at the beginning of the yr.

Agree that estimated payments are treated different than withheld... so having them withheld is the best way to go...

But, you stmt on the max penalty is not correct... the $2K is only to get to a safe place for penalty... the tax due could be much higher as the OP did not say what taxes might be in total for the year...

 

[kaneohe]

Agree that estimated payments are treated different than withheld... so having them withheld is the best way to go...

But, you stmt on the max penalty is not correct... the $2K is only to get to a safe place for penalty... the tax due could be much higher as the OP did not say what taxes might be in total for the year...

Are we talking 2 different things here? OP said 2K more for safe harbor and I was talking about penalty for not meeting safe harbor in timely fashion. As I understand it, you are talking about the balance of the tax due which could be anything.

 

[Texas Proud]

Are we talking 2 different things here? OP said 2K more for safe harbor and I was talking about penalty for not meeting safe harbor in timely fashion. As I understand it, you are talking about the balance of the tax due which could be anything.

IIRC, if you do not meet safe harbor then the penalty is based on the tax that is owned, not the safe harbor amount you should have paid...

So, if I am correct, the calculation you made on max penalty is not correct... it could be much higher...


Now, this was back in the early 80s, but when I was doing taxes there was someone who the firm told to make a payment so he would be safe as his income was going to go up many times his old income due to receiving income from an estate... IIRC, the penalty was in the $20,000 range... I do not know if they tried to get it reduced or eliminated as I was not the one who handled that part... and all he had to do was send in something like $100.... back then all you had to do was pay last years tax liability and you were safe...

 

[kaneohe]

IIRC, if you do not meet safe harbor then the penalty is based on the tax that is owned, not the safe harbor amount you should have paid...

So, if I am correct, the calculation you made on max penalty is not correct... it could be much higher...


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

OK, now I understand. Perhaps things have changed...........check out F2210
https://www.irs.gov/pub/irs-pdf/f2210.pdf

At least for the simple case, I believe the penalty is based on shortfall from safe harbor. Pt I establishes safe harbor as Min (100-110% last yr taxes, 90% this yr taxes). Pt III calculates penalty based shortfall from safe harbor.

This is nice when things are smooth and continuous. Miss target by a little and pay a little. The other way, miss it by a little and pay a LOT would have a large step discontinuity which would not be nice or fair , IMHO.

 

[Texas Proud]

OK, now I understand. Perhaps things have changed...........check out F2210
https://www.irs.gov/pub/irs-pdf/f2210.pdf

At least for the simple case, I believe the penalty is based on shortfall from safe harbor. Pt I establishes safe harbor as Min (100-110% last yr taxes, 90% this yr taxes). Pt III calculates penalty based shortfall from safe harbor.

This is nice when things are smooth and continuous. Miss target by a little and pay a little. The other way, miss it by a little and pay a LOT would have a large step discontinuity which would not be nice or fair , IMHO.

I decided to take a look at my sister's return I did for her.... she paid a penalty because she did not have enough withheld...

It does look like they take into consideration last years taxes... IOW, the penalty is based on this years underpayment or last years total taxes...


I agree that this is more fair than previous when I did taxes... back then you were either safe or not... and not could be bad... then again, back they they had income averaging which could help if you have a big year or two...

 

[Senator]

The IRS is very unlikely to worry about $2K being paid a few month's late. The taxes will not change, only the penalty. The IRS has more important things to do than chase a few hundred from an old man.

It's better to pay as you earn income, but if income is earned unevenly, amount swill be different. Or if unexpected income comes in later in the year, December amounts will be higher.

 

[rayvt]

The IRS is very unlikely to worry about $2K being paid a few month's late. The taxes will not change, only the penalty. The IRS has more important things to do than chase a few hundred from an old man.

You are joking, right? Nobody who has had dealings with the IRS could possibly say this.
Their computer spits out the penalty, sends out a demand letter, and you have to pay it.

 

[Senator]

You are joking, right? Nobody who has had dealings with the IRS could possibly say this.
Their computer spits out the penalty, sends out a demand letter, and you have to pay it.

Does the IRS get a notice of when the income was produced, or just a 1099 for the year?

 

[rayvt]

IIRC, if you do not meet safe harbor then the penalty is based on the tax that is owned, not the safe harbor amount you should have paid...

Nope. The penalty is based on the difference between what you paid and the safe harbor amount.

Turbotax told me this quite clearly.

Aaah, details are Form 2210, lines 5 - 9. Lines 5 & 8 are the two safe-harbor amounts. Line 9 says you use the lesser of them.
Lines 10-14 compute the underpayment as the difference between estimated payments plus withholdings and the line 9 safe-harbor amount.

As others already said, the way to go is an IRA withdrawal with a large withholding. The IRS publications talk about *timely* estimated tax payments and witholding (without modifiers). Also note that there is no tax form that attaches a date to a withholding, so they don't really know when the various withholdings took place -- only the amount.

The simplest thing to do is an IRA withdrawal and withhold enough to get your total withheld up to 100% of the previous year's tax, before Dec 31. You know that for certain. You don't know the exact amount of this year's tax so you can't know for certain what 90% of it is.

Pub 505 says: " If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have underpaid your estimated tax and may have to pay a penalty. "

 

[rayvt]

Does the IRS get a notice of when the income was produced, or just a 1099 for the year?

This question contains its own answer.

 

[SecondCor521]

Lines 10-14 compute the underpayment as the difference between estimated payments plus withholdings and the line 9 safe-harbor amount.

As others already said, the way to go is an IRA withdrawal with a large withholding. The IRS publications talk about *timely* estimated tax payments and witholding (without modifiers). Also note that there is no tax form that attaches a date to a withholding, so they don't really know when the various withholdings took place -- only the amount.

Looking at Form 2210, it seems to me that an estimated tax payment of $2K would be OK:

Line 10 would be 110% of previous year's taxes due
Line 11 would be the amount withheld from his RMD (which is about $1700 less than line 10)
Line 12 would be $2K estimated tax payment in December
Line 13 would be line 11 plus 12
Line 14 would be less than zero, stop, no penalty.

He could withdraw some more money from his IRA and do it that way but would probably prefer to avoid it I think.

 

[kaneohe]

Unlikely that you would be able to use the short method in Pt III because:
**************************************
Can You Use the
Short Method?
You can use the short method if:
• You made no estimated tax payments (or your only payments were withheld
federal income tax), or
• You paid the same amount of estimated tax on each of the four payment
due dates
****************************************
If you didn't pay in equal installments, then you have to use the regular method which accounts for timing in the payments. (or use Sch AI which accounts for varying income during the yr......but sounds like you got the income early so this would not only be a lot more work but it would probably cost you more too.

If you want to use the IRA withdrawal to withhold the needed tax, you can consider replacing the funds within 60 days
as a rollover. However note that you can do such a rollover only once every 12 months (365days) for all your TIRAs
and Roths combined.

 

[Senator]

This question contains its own answer.

Maybe I misread the OPs question.

From what I read, the correct amount of tax was going to be paid, although not in the same quarter as when the income was earned or withdrawn. $2,000 should have been paid earlier. Taxes can be paid anytime, there are four due dates that are required. Paying taxes early is fine. Paying in a later quarter is probably not a big deal on a $2,000 payment.

So, the right amount of tax sent in by year end. The income that had the tax paid on is declared on an annual 1099.

Good enough.

 

[kaneohe]

You are joking, right? Nobody who has had dealings with the IRS could possibly say this.
Their computer spits out the penalty, sends out a demand letter, and you have to pay it.

I don't know how the IRS process works but it probably is not this sophisticated. I know a fellow who does not pay any estimated tax and when I suggested he do so , he told me that he was not going to worry about it since he had been doing it for years and had never gotten a penalty. Sample size of one, admittedly.

 

[Texas Proud]

Senator is probably right.... as long as you paid the tax before year end a penalty will not be calculated...


But, to Senator... there is a presumption that income is earned evenly throughout the year... and they know when an estimated tax payment is paid... so they can calculate a penalty by 'quarter' and apply withholding to the qtrs that you did not pay the estimate and the one you did and see if there is a penalty due... if you did earn income irregularly then you could put down when it was earned and calculate by qtr and add them up...


BTW, when I was just out of college and doing taxes I knew a couple of people who had zero withheld for most of the year and then all withholding the last part... to me it was too much trouble to change all the time and it was not worth it... then again, interest rates were pretty high back then and it might have paid off for them...

 

[Senator]

Senator is probably right.... as long as you paid the tax before year end a penalty will not be calculated...


But, to Senator... there is a presumption that income is earned evenly throughout the year... and they know when an estimated tax payment is paid... so they can calculate a penalty by 'quarter' and apply withholding to the qtrs that you did not pay the estimate and the one you did and see if there is a penalty due... if you did earn income irregularly then you could put down when it was earned and calculate by qtr and add them up...


BTW, when I was just out of college and doing taxes I knew a couple of people who had zero withheld for most of the year and then all withholding the last part... to me it was too much trouble to change all the time and it was not worth it... then again, interest rates were pretty high back then and it might have paid off for them...

When I had a W2 job, I had a major amount of withholding taken out. I did not pay estimated taxes.

Rental income (i.e. profit), even if rents are consistent, are back end loaded. Property taxes are due early. Insurance is due early. Repairs can happen anytime, and be front end loaded. I just bought a new truck, so I will have a major deduction at year end.

The income may be evenly distributed, but that also assumes the expenses are evenly distributed too. If the expenses are more in the beginning of the year, which many are, less taxes are due in the earlier months.

 

[pb4uski]

In general, you may owe the penalty for 2016 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of:

1. 90% of your 2016 tax, or
2. 100% of your 2015 tax. (Your 2015 tax return must cover a 12-month period.)
​

Higher income taxpayers. If your adjusted gross income (AGI) for 2015 was more than $150,000 ($75,000 if your 2016 filing status is married filing separately), substitute 110% for 100% in (2) above.

You won't have to pay the penalty or file this form if either of the following applies.

• You had no tax liability for 2015, you were a U.S. citizen or resident alien for the entire year (or an estate of a domestic decedent or a domestic trust), and your 2015 tax return was (or would have been had you been required to file) for a full 12 months.
• The total tax shown on your 2016 return minus the amount of tax you paid through withholding is less than $1,000. To determine whether the total tax is less than $1,000, complete Part 1, lines 1 through 7.

From Form 2210 Instructions. I think a 99% federal withholding IRA withdrawal to get to >110% of last years tax is the easiest way to go... or better yet, to get to his total estimated tax for the current year (which as I understand the OP is ~125% of last year's tax).

 

[kaneohe]

I don't what the rules are when you have a filing status change (MFJ to single).
.

I didn't know this so I asked the world and the answer is: it is a fraction of the MFJ number. See Pub 505 p.52-53 and the Exn p. 53. Perhaps things are ok already? https://www.irs.gov/pub/irs-pdf/p505.pdf

2015 joint return and 2016 separate returns.
If you file a separate return for 2016, but
you filed a joint return with your spouse for
2015, your 2015 tax is your share of the tax on
the joint return. You are filing a separate return
if you file as single, head of household, or married
filing separately.
To figure your share of the taxes on a joint
return, first figure the tax both you and your
spouse would have paid had you filed separate
returns for 2015 using the same filing status as
for 2016. Then multiply the tax on the joint return
by the following fraction:

The tax you would have paid
had you filed a separate
return/
The total tax you and your
spouse would have paid
had you filed separate
returns

 

[rayvt]

Senator is probably right.... as long as you paid the tax before year end a penalty will not be calculated...

Could be. But that's a case of them not bothering to enforce the rules, not a case of the rule not applying.

A large withholding late in the year conforms to the rules. A large quarterly payment doesn't. (Unless a large portion of your income was earned in the 4th quarter.)

 

[scrabbler1]

Before the ACA and its premium tax credits began in 2014, my federal tax bill was usually around $1,800. I had no withholdings from any of my investment income. I would pay about 1/3 of it as part of a 3rd quarter estimated tax payment, 1/3 of it as part of a 4th quarter estimated tax payment, and the rest the following April.


My goal was to make sure the check I wrote in April was under $1,000. I suppose that technically I owed something in penalties because I paid nothing for the first or second quarters in estimated taxes and I did have some income in that time. However, it was far less than 50% of my year's total income for two reasons: First, the first 2 quarters for estimated tax purposes is actually a 5-month period, not 6 months. (The number of months per Estimated Tax quarter is not 3-3-3-3 but 3-2-3-4.) That shifts 7/12 of my more regular monthly income to the last 2 quarters. Second, I have the more erratic cap gain distributions in the last 7 months of the year, further increasing my income in the last 2 quarters.


Since 2014, I have dropped the 3rd quarter estimated tax payment because my tax bill, after reducing it by the ACA tax credit (some years I did not take it in advance), dropped to either a little over $1,000 or a little under it. I would then pay about half of the remainder in the 4th quarter and half the following April (or just pay the whole thing in April if I owed under $1,000 total). The ACA credit is a tough moving target to determine because I don't get that 1095 form until after the 4th quarter payment is due.


I suppose I have been flying under the IRS's radar all that time, as I have never been contacted about any underpayment or late payment of taxes. Or, they simply don't care about amounts so low.