Paying estimated taxes

[papadad111]

Many retirees receive no w2 income but do have income in the form of dividend and interest income, rental income etc.

With no regular withholdings from earned income, Do you now file a quarterly estimated taxes in retirement as triggered by this income?

How would I best approach starting this post FIRE ?

 

[calmloki]

We've paid quarterlies for decades due to having most of our income from rentals. We just take last year's tax and divide it by four to get our quarterly amount. That meets the IRS requirement and keeps us from having to puzzle out what we made in each quarter. Think one time many years ago I paid a $50 penalty for underpayment - paying the prior year's tax amount avoids that and days of extra form filling.

 

[aaronc879]

We've paid quarterlies for decades due to having most of our income from rentals. We just take last year's tax and divide it by four to get our quarterly amount. That meets the IRS requirement and keeps us from having to puzzle out what we made in each quarter. Think one time many years ago I paid a $50 penalty for underpayment - paying the prior year's tax amount avoids that and days of extra form filling.

When and where do you send the payment? I paid a ~$40 penalty this year and estimate my penalty for next year will be closer to $100. I'm already late for the first quarter so I won't do them this year but may start next year if I know how. I only make <$20K AGI so I don't pay a lot of income tax.

 

[Midpack]

Many retirees receive no w2 income but do have income in the form of dividend and interest income, rental income etc.

With no regular withholdings from earned income, Do you now file a quarterly estimated taxes in retirement as triggered by this income?

How would I best approach starting this post FIRE ?

Yes, if you want to avoid penalties, once you,no longer have withholding you'll most likely want to pay estimated taxes, maybe quarterly, if you have any significant investment income.

Here's everything you need to know http://www.irs.gov/pub/irs-pdf/f1040es.pdf, more reliable than piecemeal info here IMHO. The IRS doc is only 12 pages, only 5 are actual instructions, the rest reference forms, tables & worksheets. It's actually pretty easy IME...

I pay estimated state income taxes as well, also easy, in case that applies in your state.

 

[kaneohe]

When and where do you send the payment? I paid a ~$40 penalty this year and estimate my penalty for next year will be closer to $100. I'm already late for the first quarter so I won't do them this year but may start next year if I know how. I only make <$20K AGI so I don't pay a lot of income tax.

Addresses/dates given in the link by midpack above. Even if you're late it would be better to send in the payments since the penalty is really interest based on time delinquent......better to pay 1 mos. interest on Q1 payment than 1 yr. I'm guessing but if you had 20K income and filed single, Taxcaster says your tax is sl. greater than 1K. If you never paid est tax, 3% interest on that is $30 and since not all of that is due in Q1, the penalty would be more likely half of that ....so $15. How did you come up w/ the $40 -100?
Was your AGI higher in those yrs?

 

[EastWest Gal]

OP, according to your info, you live in WI. Your state tax info can be found here:

www.revenue.wi.gov

There is a link for estimated state tax payments.


Sent from my iPhone using Early Retirement Forum

 

[audreyh1]

I do everything electronically via EFTPS.gov It's nice not having to mail forms or money.

https://www.eftps.gov/eftps/

 

[aaronc879]

Addresses/dates given in the link by midpack above. Even if you're late it would be better to send in the payments since the penalty is really interest based on time delinquent......better to pay 1 mos. interest on Q1 payment than 1 yr. I'm guessing but if you had 20K income and filed single, Taxcaster says your tax is sl. greater than 1K. If you never paid est tax, 3% interest on that is $30 and since not all of that is due in Q1, the penalty would be more likely half of that ....so $15. How did you come up w/ the $40 -100?
Was your AGI higher in those yrs?

I know my penalty was in the upper $30's for not paying quarterly for my 2014 AGI income of just over $20K. Not sure how they figured that out at H&R Block but I trust they know what they're doing. They estimated that my penalty would be bigger next year but still under $100. Not sure how they figured that either.

The penalty is pretty small so I may not bother doing quarterly. I'm good at keeping enough cash available even with my low income so that's not a problem.

 

[samclem]

I do everything electronically via EFTPS.gov It's nice not having to mail forms or money.

https://www.eftps.gov/eftps/

+1. EFTPS works great after you set up the account.
Of course, if a person has a pension or SS coming in, it would be possible to just bump up that withholding to cover the anticipated income from investments.

 

[arky]

Ditto on EFTPS. Ditto on paying an amount at least equal to the prior year.

 

[W2R]

I do everything electronically via EFTPS.gov It's nice not having to mail forms or money.

https://www.eftps.gov/eftps/

Yes, after sending my payments in by snail mail for several years, I read a post by Audrey about this and because of that post I switched to EFTPS a couple of years ago. (Thanks Audrey!) EFTPS is terrific and has worked flawlessly for me.

For me, the cool thing about EFTPS is that I can schedule all four quarterly payments in one sitting in March, and the designated amounts are paid on the designated dates. No fuss, no bother.

 

[aaronc879]

Yes, after sending my payments in by snail mail for several years, I read a post by Audrey about this and because of that post I switched to EFTPS a couple of years ago. (Thanks Audrey!) EFTPS is terrific and has worked flawlessly for me.

For me, the cool thing about EFTPS is that I can schedule all four quarterly payments in one sitting in March, and the designated amounts are paid on the designated dates. No fuss, no bother.

I'll look into that. Sounds like the way to go. If I didn't do a quarterly payment for the first quarter of this year should I divide last years tax by 3 and pay that amount for the next 3 payments? Or should I divide it by 4 with the first payment being a few weeks late?

 

[aaronc879]

Do you pay 100% of the previous years federal tax or federal tax + FICA? FICA is the big expense for me. State, Federal, and FICA totaled almost $5K and FICA alone was around $3K on an AGI of just over $20K.

 

[kaneohe]

Do you pay 100% of the previous years federal tax or federal tax + FICA? FICA is the big expense for me. State, Federal, and FICA totaled almost $5K and FICA alone was around $3K on an AGI of just over $20K.

If employer withholds FICA from wages, then I believe it is not considered for this purpose. If you pay self-employment taxes (the equivalent of FICA), then it is included for this purpose.......see the wksht in the 1040ES link in a previous post (line 11)

 

[aaronc879]

If employer withholds FICA from wages, then I believe it is not considered for this purpose. If you pay self-employment taxes (the equivalent of FICA), then it is included for this purpose.......see the wksht in the 1040ES link in a previous post (line 11)

I'm self employed, nothing is taken from my checks.

 

[W2R]

I'll look into that. Sounds like the way to go. If I didn't do a quarterly payment for the first quarter of this year should I divide last years tax by 3 and pay that amount for the next 3 payments? Or should I divide it by 4 with the first payment being a few weeks late?

I am NOT a tax expert. Just wanted to make that clear. I know NOTHING - - I'm just bumbling along....

If it was me, first I'd estimate my tax by using last year's tax, or estimating a larger number if you think your tax will be more. Then I'd divide that by 4 to make 4 payments, pay one immediately, and pay the second when it is due (June), the third when it is due (September), and the 4th when it is due (Jan 2016).

Your first payment is only a couple of weeks late AFAIK. They'll let you know if that means you owe more.

I am assuming that your income will probably be fairly steady throughout the year. If you have more income early in the year, then you probably need to make your earlier payments more and your later payments less.

 

[MichaelB]

I'll look into that. Sounds like the way to go. If I didn't do a quarterly payment for the first quarter of this year should I divide last years tax by 3 and pay that amount for the next 3 payments? Or should I divide it by 4 with the first payment being a few weeks late?

I'm another "not a tax expert", but I'd pay the first quarter now & late, and the remaining quarters on time. I'd also make sure to cover 100% of my estimated tax.

 

[kaneohe]

I know my penalty was in the upper $30's for not paying quarterly for my 2014 AGI income of just over $20K. Not sure how they figured that out at H&R Block but I trust they know what they're doing. They estimated that my penalty would be bigger next year but still under $100. Not sure how they figured that either.

The penalty is pretty small so I may not bother doing quarterly. I'm good at keeping enough cash available even with my low income so that's not a problem.

Probably the reason the penalty is higher is because you have self-employment income. Previously I guess-timated $15 penalty not knowing that based on 1K taxes. The HR Block calculator got about 3.7K taxes assuming all 20K was self employment so that would be about $55 penalty if all income was self employment. If you had other income, tax and penalty would be less.

 

[pb4uski]

When and where do you send the payment? I paid a ~$40 penalty this year and estimate my penalty for next year will be closer to $100. I'm already late for the first quarter so I won't do them this year but may start next year if I know how. I only make <$20K AGI so I don't pay a lot of income tax.

Have you considered the annualized income installment method? Our income is loaded in the fourth quarter since it is mostly dividends, capital gain distributions, capital gains for our fourth quarter rebalancing, and Roth conversions so as of each of the first 3 quarters our taxes would be nil based on our YTD income. So I only make an estimated payment in the last quarter of the year, and even if I failed to do so there would be no penalty or interest for the first 3 quarters.

You have to do a little more analytical work (Form 2210AI) to prove that you did not have a tax liability in those quarters.

The same principle can be used on penalties. In my first year retired, my state sent me a nastygram that I owed penalties and interest because i was underpaid. After I wrote to them and explained that our income was loaded into the last quarter of the year and we owed no tax for the first three quarters and that I paid what I owed for the last quarter timely, they abated the penalties and interest.

 

[scrabbler1]

Remember that the 4 "quarters" are not all 3 months each. The number of months for each "quarter" is 3, 2, 3, and 4. For me, like pb4uski, I have my income not evenly spread out over the year. I receive income "spikes" in the form of cap gain distributions in June (third "quarter") and December (fourth "quarter"). As a result, I make estimated tax payments only in the 4th quarter in most years. On the federal side, this helps me to "bunch" my itemized deductions because I can choose which calendar year to make my one estimated state income tax payment (December or January). In calendar year 2014 I paid estimated state income tax payments in January and December but for calendar year 2015 I will make no estimated state income tax payments.


I owe relatively little in taxes and have never paid any penalties so I suppose I am flying under the tax radar anyway.

 

[fritz]

Have you considered the annualized income installment method? Our income is loaded in the fourth quarter since it is mostly dividends, capital gain distributions, capital gains for our fourth quarter rebalancing, and Roth conversions so as of each of the first 3 quarters our taxes would be nil based on our YTD income. So I only make an estimated payment in the last quarter of the year, and even if I failed to do so there would be no penalty or interest for the first 3 quarters.

You have to do a little more analytical work (Form 2210AI) to prove that you did not have a tax liability in those quarters.

The same principle can be used on penalties. In my first year retired, my state sent me a nastygram that I owed penalties and interest because i was underpaid. After I wrote to them and explained that our income was loaded into the last quarter of the year and we owed no tax for the first three quarters and that I paid what I owed for the last quarter timely, they abated the penalties and interest.

+1 Good for uneven income scenarios. I also ran into an issue with the state one year, as they assume all W2 income is received evenly throughout the year. I work part-time (consulting work) for a start-up design engineering firm and quarterly income can be uneven. Had to have the company verify quarterly incomes, and penalty was (eventually) removed - state where we live took until October of that year to take care of the issue, and pay the refund originally owed.

 

[audreyh1]

I sometimes use the annualized method, but the calcs are pretty complex, and even though I have the spreadsheets, they have to be updated every two or three years as the rules keep changing. Maintenance is becoming a major chore.

 

[athena53]

We're paying estimated for the first time this year. I'm assuming that we'll make the max up through the 15% tax bracket. Will do a Roth conversion if investment income doesn't get us to that point. So, that makes calculation of estimated payments easy. If investment income bumps us into a higher bracket, I'm also keeping track of our income by month (have taken profits on some stocks) so that if we get hit by a ton of capital gain distributions in November/December we'll still be OK.

 

[rbmrtn]

I'm self employed, nothing is taken from my checks.

For self employed you have different set of issues, check IRS self employment page, Self-Employed Individuals Tax Center

 

[pb4uski]

I sometimes use the annualized method, but the calcs are pretty complex, and even though I have the spreadsheets, they have to be updated every two or three years as the rules keep changing. Maintenance is becoming a major chore.

Yes, it is a bit of a chore, especially since the periods are not true calendar quarters as someone previously mentioned. Luckily, I can do some Quicken reports and get most of the info for each period. Even though I cuss to myself what a PITA it is to do, the reality is that it takes me less than an hour.

Given how low the time value of money is right now though, it might be easier just to do an estimate for the year and make quarterly payments.