First year for estimated taxes...

[Badger]

...and I didn't have a clue. Last year I had some income from my last few paychecks and DW pension where taxes were taken out in addition to Dw SS and dividends. This year our income was DW pension, SS, and dividends. I also recently moved money from an IRA to a Roth IRA to make our income just within the 15% tax bracket. I thought I could pay the estimated taxes when I had all the information to make a proper estimate. I guess I was wrong.

Yesterday I mailed what I figured would be our taxes for this year. From what I read in a recent post on estimated taxes it looks like I may be in for a penalty charge from the IRS.

Is it necessary to pay my estimated taxes quarterly from now on or is there another option like maybe all at once on the first quarter of the year to avoid any penalty?

Cheers!

 

[gromit]

Yes, you can choose to pay an entire year's estimated tax in the first quarter if you like. If you decide to pay quarterly, be aware that the 4 "quarters" do not all contain 3 months each.
1st quarter = JAN, FEB, MAR
2nd quarter = APR, MAY
3rd quarter = JUN, JUL, AUG
4th quarter= SEPT, OCT, NOV, DEC
Deadlines are 15th of APR, JUN, SEPT and JAN respectively.

 

[audreyh1]

...and I didn't have a clue. Last year I had some income from my last few paychecks and DW pension where taxes were taken out in addition to Dw SS and dividends. This year our income was DW pension, SS, and dividends. I also recently moved money from an IRA to a Roth IRA to make our income just within the 15% tax bracket. I thought I could pay the estimated taxes when I had all the information to make a proper estimate. I guess I was wrong.

Yesterday I mailed what I figured would be our taxes for this year. From what I read in a recent post on estimated taxes it looks like I may be in for a penalty charge from the IRS.

Is it necessary to pay my estimated taxes quarterly from now on or is there another option like maybe all at once on the first quarter of the year to avoid any penalty?

Cheers!

The easiest thing to do is to use the "safe harbor" rule. As long as you pay the same as the prior year's taxes (or 110% of prior years taxes if income over $150K) in four equal installments on the estimated tax payment quarterly deadlines, you are "safe" and will not owe a penalty, even if end up owing quite a bit more by the next April 15.

If you absolutely, surely, know what your tax is going to be for the year, than as long as you have paid 90% of what you will owe in four equal installments by the quarterly deadlines you will be safe.

Otherwise, you have to use the annualized income method to pay taxes as due each quarter. This is a lot more complicated (but not impossible) and can be worth the effort if income in the current year is much lower than prior year, OR income is bunched at the end of the year. In this case you must file Form 2210 with your 1040 to demonstrate the timing of your actual income by quarter.

Most people seem to use the first scenario based on prior year's taxes. It's simple and safe and most tax programs will calculate it for you when you file your taxes for the prior year.

 

[jebmke]

The easiest thing to do is to use the "safe harbor" rule. As long as you pay the same as the prior year's taxes (or 110% of prior years taxes if income over $150K) in four equal installments on the estimated tax payment quarterly deadlines, you are "safe" and will not owe a penalty, even if end up owing quite a bit more by the next April 15.

Unless I am coming off an unusual year (income spike), this is what I do. Take my tax liability for the year, divide by 4. Then I set up the payments on EFTPS. Takes about 20 minutes to do the whole thing.

In December I do a pro-forma return so I can true up my state estimated payments before Dec 31 but I don't worry about the Fed since the harbor is safe.

 

[tuixiu]

Pardon my dumbassedry as I've never had to quarterly estimated taxes, but is there no lower limit for taxes owed that have this requirement?

Like if our tax burden for 2014 is $500 then we'd need to pay $125/quarter to void getting a penalty?

 

[RunningBum]

I don't think there's a lower limit, but the penalty won't be very high on a small amount. On the other hand, if the goal is for you to hang onto your money rather than give the IRS an interest free loan, holding back on a smaller amount isn't worth it. And I wonder if underpaying your taxes also increases your chance of an audit. It's very easy to set up an account with the IRS in EFTPS and you can also automate the payments. I don't think it's hard to change them if your situation through the year changes. I know I was able to add an extra payment.

 

[rbmrtn]

Pardon my dumbassedry as I've never had to quarterly estimated taxes, but is there no lower limit for taxes owed that have this requirement?

Like if our tax burden for 2014 is $500 then we'd need to pay $125/quarter to void getting a penalty?

I think so, but it may not be worth the trouble. I'm staying in the 15% bracket for favorable treatment for QD and CGs and some muni interest ( also for the ACA subsidy ). So the penalty on what I expect to owe is around $50 per tax calculator. Seems more trouble than it's worth.

 

[kaneohe]

Pardon my dumbassedry as I've never had to quarterly estimated taxes, but is there no lower limit for taxes owed that have this requirement?

Like if our tax burden for 2014 is $500 then we'd need to pay $125/quarter to void getting a penalty?

$1000? http://www.irs.gov/pub/irs-pdf/f2210.pdf

 

[audreyh1]

Pardon my dumbassedry as I've never had to quarterly estimated taxes, but is there no lower limit for taxes owed that have this requirement?

Like if our tax burden for 2014 is $500 then we'd need to pay $125/quarter to void getting a penalty?

I think the lower limit is $1000 owed in taxes.

 

[Badger]

Thanks for all the replies. I'll have to take my lumps this first year and pay the penalty if the IRA thinks it is that important to spank me. After that I might just pay it all in the first quarter to avoid quarterly payments at least for the next few years. Otherwise I will mark my calendar for the first week of April, June, Sept, and Jan. to mail out by quarter. It would be nice if they would go to a different tax system that would get rid of most of the IRS and all the reams of tax proceedures.

Cheers!

 

[meierlde]

Thanks for all the replies. I'll have to take my lumps this first year and pay the penalty if the IRA thinks it is that important to spank me. After that I might just pay it all in the first quarter to avoid quarterly payments at least for the next few years. Otherwise I will mark my calendar for the first week of April, June, Sept, and Jan. to mail out by quarter. It would be nice if they would go to a different tax system that would get rid of most of the IRS and all the reams of tax proceedures.

Cheers!

Note that the current penalty rate if you do the annual method is about 1.99% or a rate of about 4% per annum.

 

[tinlizzy]

Badger - sometimes I do the estimated taxes after selling stocks and I just print off the vouchers and hang them on the fridge. Weird, maybe, but I have an awful memory! You can just google for the vouchers when you want them.

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

 

[tuixiu]

$1000? http://www.irs.gov/pub/irs-pdf/f2210.pdf

I think the lower limit is $1000 owed in taxes.

Perfect, thanks.

 

[OAG]

If first time you could ask for a waiver of the penalty and interest - won't hurt to ask!

 

[medtech]

I have an inherited IRA that I must take yearly distributions from. I have Fidelity withhold what I estimate my federal and state taxes will be from the distribution and I'm done for the year. Towards the end of the year if it appears I did not withhold enough I can take another distribution and have it all withheld for taxes.

I have found this web site to be helpful to figure out what portion of my social security may be taxable.
How much of my social security benefit may be taxed? | Calculators by CalcXML

 

[Gill]

If first time you could ask for a waiver of the penalty and interest - won't hurt to ask!

There is not penalty and interest - just penalty.
Bruce

 

[kaneohe]

There is not penalty and interest - just penalty.
Bruce

or perhaps the penalty is the interest.

 

[OAG]

Instructions for Form 2210 (2012)

2013 not available yet.