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Underpayment penalties
Old 03-09-2014, 06:16 PM   #1
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Underpayment penalties

Doing my taxes and Turbotax is calculating a penalty.

The dividends and cap gains distributions are growing every year but I'm not sure how to calculate them.

My impression is that many funds disburse more of the dividends and cap gains distributions towards the end of the year than distributing equal amounts every quarter.

Is that not the case?

If it is, how can the IRS expect you to predict how much overall they'll be?

Have anyone else been posting estimated tax payments in anticipation of the dividends and cap gains distributions raising their tax liabilities beyond what withholding and other tax payments are expected to cover?
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Old 03-09-2014, 06:47 PM   #2
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Quote:
Originally Posted by explanade View Post
Doing my taxes and Turbotax is calculating a penalty.

The dividends and cap gains distributions are growing every year but I'm not sure how to calculate them.

My impression is that many funds disburse more of the dividends and cap gains distributions towards the end of the year than distributing equal amounts every quarter.

Is that not the case?

If it is, how can the IRS expect you to predict how much overall they'll be?

Have anyone else been posting estimated tax payments in anticipation of the dividends and cap gains distributions raising their tax liabilities beyond what withholding and other tax payments are expected to cover?
I send in the same amount quarterly, even though I do get more yield in December than any other month. So, I suppose you might say that was "in anticipation of the dividends and cap gains distributions".

It probably costs me a little bit more, but it keeps me from getting the attention of the IRS. I try to stay under their radar for fear of triggering an audit (which is scary to me even though I have done nothing wrong AFAIK, but who wants an audit?).

If you send as much as what would have been correct last year, and if nothing changed, and if you haven't underpaid two years in a row, then I think they don't penalize you? But check on that before believing me.
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Old 03-09-2014, 07:53 PM   #3
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Quote:
Originally Posted by explanade View Post
Doing my taxes and Turbotax is calculating a penalty.

The dividends and cap gains distributions are growing every year but I'm not sure how to calculate them.

My impression is that many funds disburse more of the dividends and cap gains distributions towards the end of the year than distributing equal amounts every quarter.

Is that not the case?

If it is, how can the IRS expect you to predict how much overall they'll be?

Have anyone else been posting estimated tax payments in anticipation of the dividends and cap gains distributions raising their tax liabilities beyond what withholding and other tax payments are expected to cover?
I have this problem with my state income tax and file a state annualized income form 2210. I pulled the info below off the IRS website for Federal. I haven't had to use the Federal form yet myself, but the (complicated) state form I use, allows for this scenario. It's a real pain in the butt, but Turbotax always calculates a state penalty w/o it (I don't use Turbotax with annualized state income, as I have to calculate estimated state tax payments yearly, and then quarterly annualized for the good years like last year). Taxable account capital gains are a nice problem, but it also lets you feel the pain when you expose some when moving money around (I pay that tax in the next quarterly annualized payment). I do pay the estimated full boat state annualized taxes quarterly and before the year end - not required, just me. First annual look is usually none required, as estimated taxes on estimated income after withholding and deductions doesn't require it (complicated scenario as I'm retired and do part-time consulting, but capital gains can easily push me over the edge.

The capital gains with my Vanguard accounts are posted before years end (and when I move money around). I mail off my payment for a before-the-year-end posting - again, just me as they aren't due until January 15th of the following year.

Annualized Income Installment Method (Schedule AI)

If you did not receive your income evenly throughout the year (for example, your income from a shop you operated at a marina was much larger in the summer than it was during the rest of the year), you may be able to lower or eliminate your penalty by figuring your underpayment using the annualized income installment method. Under this method, your required installment (Part IV, line 18) for one or more payment periods may be less than one-fourth of your required annual payment.
To figure your underpayment using this method, complete Form 2210, Schedule AI. Schedule AI annualizes your tax at the end of each payment period based on your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period.
If you use the annualized income installment method, you must check box C in Part II of Form 2210. Also, you must attach Form 2210 and Schedule AI to your return.
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Old 03-09-2014, 08:02 PM   #4
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I have completed my Turbotax for 2013, but I have not yet submitted. I owe money, but, so far, Turbotax has not said anything about a penalty. I have used Turbotax for many years. I had a small refund last year.

Most of my income is IRA withdrawals with some dividends and SS. No pension.

I have been withholding 10% from IRA withdrawals. Since I discovered that I owe money, I have started 10% withholding on SS.

I don't plan to send estimated taxes. If I need more withheld, I will adjust my IRA withholding which is easily done and can be done up to the last day of the year. I withdraw from my IRA's from cash accounts within the IRA's monthly.

I have paid no state income tax since I've been retired.
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Old 03-09-2014, 08:07 PM   #5
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The estimated payments are made quarterly, so you can recalculate for each quarter. Payment for Dec distribution would be due the following Jan.

Estimated Taxes

They also have an online system now to make payments

https://www.eftps.gov/eftps/
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Old 03-09-2014, 09:31 PM   #6
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Originally Posted by rbmrtn View Post
The estimated payments are made quarterly, so you can recalculate for each quarter. Payment for Dec distribution would be due the following Jan.

Estimated Taxes

They also have an online system now to make payments

https://www.eftps.gov/eftps/
This is what I use, and in December when I received an unexpectedly high cap gains distribution I made an extra high est. tax payment
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Old 03-09-2014, 10:02 PM   #7
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Actually if not sure use the safe harbor, such that payments equal 100% of the prior years taxes if your income is under 150k and 110% if over 150k. With todays interest rates your not leaving to much on the table at that rate. Or if you make equal payments of estimated taxes then the penalty is 1.995% this year, which is low, so perhaps if you did the equal estimated payments again its not that big a hit.
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Old 03-09-2014, 10:11 PM   #8
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Remember that the 4 "quarters" for makng estimated income taxes are not actually 3 months each. Instead of 3, 3, 3, 3, they are actually 3, 2, 3, 4.

I have income spikes (due to cap gain distributions) in June and December, months which fall in the third (not second) estimated income tax period and fourth estimated income tax period. As a result, I get about 2/3 of my total taxable income in the last 2 estimated income tax periods even though they consist of about 58% of the months (7/12) of the year.

I pay about 35%-40% of my estimated income taxes in each of the 3rd and 4th periods with the remainder in April for state and about 50-50 between 4th and April for federal. This is because some of those income spikes are LTCG which are not taxable at the federal level. With my total income tax bills around $2,000 or less, I figure I am staying under the radar with each of my payments of about $600 or $700.
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Old 03-09-2014, 10:38 PM   #9
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Originally Posted by scrabbler1 View Post
Remember that the 4 "quarters" for makng estimated income taxes are not actually 3 months each. Instead of 3, 3, 3, 3, they are actually 3, 2, 3, 4.

I have income spikes (due to cap gain distributions) in June and December, months which fall in the third (not second) estimated income tax period and fourth estimated income tax period. As a result, I get about 2/3 of my total taxable income in the last 2 estimated income tax periods even though they consist of about 58% of the months (7/12) of the year.

I pay about 35%-40% of my estimated income taxes in each of the 3rd and 4th periods with the remainder in April for state and about 50-50 between 4th and April for federal. This is because some of those income spikes are LTCG which are not taxable at the federal level. With my total income tax bills around $2,000 or less, I figure I am staying under the radar with each of my payments of about $600 or $700.
Recall that the minimum balance to even trigger a penalty is $1000 or paying less than 90% of the amount due, (whichever is larger i.e. if you owe 2k total you could fall 50% short and not owe a penalty)
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Old 03-09-2014, 11:56 PM   #10
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Well TT is showing a $65 penalty for federal and $88 penalty for state (CA).

Yeah I don't like getting in their radar either so I'll have to remind myself to make some payments.

If my cap gains distributions and dividends are higher each year, that's a nice problem to have, I suppose.
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Old 03-10-2014, 07:31 AM   #11
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I generally get a refund of a couple hundred. To make sure I haven't underpaid the quarterly taxes, I send in another $1000 in the January payment. That $1000 will only be in their hands about a month and then I'll get the refund.
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Old 03-10-2014, 09:04 AM   #12
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If you know the amount of dividends and interest received each quarter, go to Forms in TurboTax and select form 2210. If the vast majority of your dividends are 4th q, you will end with a much smaller penalty.
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