Another quarterly estimated taxes question

[racy]

I'm looking at this IRS page: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes And, quoting:

"Who Must Pay Estimated Tax
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed."

"Who Does Not Have To Pay Estimated Tax
You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.

*You had no tax liability for the prior year
*You were a U.S. citizen or resident for the whole year
*Your prior tax year covered a 12-month period"

My question-- I expect to owe tax of $1000 or more on taxable account dividends and interest. However, I do meet all 3 of the above conditions for not having to pay estimated taxes.

So, which is it? Do I need to make quarterly payments or not?

 

[pb4uski]

Your tax for last year was zero? (before withholdings and estimated payments).

FWIW, I just do a tax-deferred withdrawal in Dec for my estimated taxes and have that tax-deferred withdrawal fully withheld so my net proceeds are nil.... the IRS counts withdrawals as having be made throughout the year no matter when the withholding is done.

 

[audreyh1]

If you owed $0 in Federal taxes prior year you are golden as you meet the safe harbor rule of paying prior year’s taxes which were $0.

 

[RunningBum]

To be clear, that means your total tax liability was $0. Not that you owed $0 after filling out your return and resolving tax liability - taxes withheld.

 

[RetireBy90]

FWIW, I just do a tax-deferred withdrawal in Dec for my estimated taxes and have that tax-deferred withdrawal fully withheld so my net proceeds are nil.... the IRS counts withdrawals as having be made throughout the year no matter when the withholding is done.

Quick question, as this is my first year without having wages, I plan to do the same, just a withdrawal from TIRA and have 100% withheld. However, I will need to remember that this withdrawal will add to the total income so will owe tax on the tax payment, correct ?


Thanks for keeping me straight on this

 

[kaneohe]

Your tax for last year was zero? (before withholdings and estimated payments).

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

That is the key question. It would seem strange to have: "I expect to owe tax of $1000 or more on taxable account dividends and interest" this yr
but not to be similar last yr.

 

[ERD50]

To be clear, that means your total tax liability was $0. Not that you owed $0 after filling out your return and resolving tax liability - taxes withheld.

I always found that wording confusing. Why don't they just spell it out - "You had ZERO on line X on your 1040 for the previous tax year".

And doesn't that fall under the "Safe Harbor Rule" as well? 100% of zero is zero. Seems redundant.

-ERD50

 

[racy]

OP here--
I did pay taxes last year but got a refund. So, I'm hearing that I DID have a "tax liability" even though I didn't owe anything on April 15th. So, I need to pay quarterly estimated taxes...right?

 

[cathy63]

OP here--
I did pay taxes last year but got a refund. So, I'm hearing that I DID have a "tax liability" even though I didn't owe anything on April 15th. So, I need to pay quarterly estimated taxes...right?

Have a look at your tax return for 2018. If the number on line 15 of your form 1040 is greater than $1000 and you think that number on this year's return will be greater than $1000, then you should be paying estimated taxes.

You've already missed the April 15 and June 15 payments, so if you don't have any withholding, and your income is spread throughout the year, you should catch up ASAP to minimize the penalties you'll owe for not making timely payments. If your income is all in the 3rd and 4th quarters, then you'll want to file form 2210 with your taxes next April in order to avoid penalties.

 

[RunningBum]

Yes. If there's a way to do withholding from your investments you can do it that way, otherwise you need to do the quarterly estimated payments. It's pretty simple.

 

[racy]

Thanks, everybody!
Ray

 

[pb4uski]

Quick question, as this is my first year without having wages, I plan to do the same, just a withdrawal from TIRA and have 100% withheld. However, I will need to remember that this withdrawal will add to the total income so will owe tax on the tax payment, correct ?...

Correct. So if your marginal tax rate is 22% and you want to pay $10,000 in tax you need to withdraw $12,820 because the $12,820 withdrawal will result in $2,820 in tax.

$12,820 = $10,000/(1-22%)

 

[pb4uski]

OP here--
I did pay taxes last year but got a refund. So, I'm hearing that I DID have a "tax liability" even though I didn't owe anything on April 15th. So, I need to pay quarterly estimated taxes...right?

Yes... because you didn't meet the criteria of not having a tax liability last year. IOW, tax liability means if you paid taxes at all before considering any withholdings or estimated payments.

 

[OldShooter]

Correct. So if your marginal tax rate is 22% and you want to pay $10,000 in tax you need to withdraw $12,820 because the $12,820 withdrawal will result in $2,820 in tax.

$12,820 = $10,000/(1-22%)

Too hard. We just pay the safe harbor amount, which for us IIRC is 110% of the previous years' taxes. If it results in a small overpayment for the current year, the gummint only has our money from December to whenever it pays a refund against our tax return. Truthfully, out of pure sloth I often just let the overpayment be applied towards the next year's taxes. This, of course, reduces what I have to have withheld in the following December and costs me 12 months' float on the money.

 

[michelek]

Does it matter which quarter in which you deposit the estimates? Will the IRS penalize you if you earn the income in the first quarter but don’t make the estimated tax payment until the fourth quarter?

 

[kaneohe]

Does it matter which quarter in which you deposit the estimates? Will the IRS penalize you if you earn the income in the first quarter but don’t make the estimated tax payment until the fourth quarter?

Yes, for estimated tax payments you either pay in equal quarterly payments
(no questions asked) or you pay according to income in each quarter and prove it w/ Sch AI of F2210. If you withhold instead, no questions asked.

 

[GrayHare]

Yes, for estimated tax payments you either pay in equal quarterly payments
(no questions asked) or you pay according to income in each quarter and prove it w/ Sch AI of F2210. If you withhold instead, no questions asked.

I'm not sure that's the case but at the moment I can't find it in the regs. AFAIK, if, for example, all your income arrives during 1Q, you have to pay the full estimate of tax on it by April 15. If you instead spread payments equally across the year, in an audit the IRS could say you underpaid during 1Q. For state estimated taxes, I can imagine this detail might vary from one state to another.

 

[OldShooter]

I'm not sure that's the case but at the moment I can't find it in the regs. AFAIK, if, for example, all your income arrives during 1Q, you have to pay the full estimate of tax on it by April 15. If you instead spread payments equally across the year, in an audit the IRS could say you underpaid during 1Q. For state estimated taxes, I can imagine this detail might vary from one state to another.

We get income during the year but pay by withholding only once, the second or third week of December. Both Fed and State.

 

[pb4uski]

Too hard. ...

Yup, division is hard. Your DW is an ex-banker... maybe she can help you out with the math.

 

[pb4uski]

Does it matter which quarter in which you deposit the estimates? Will the IRS penalize you if you earn the income in the first quarter but don’t make the estimated tax payment until the fourth quarter?

Yes and yes.... that is why the withholding option is preferable to the estimated tax option.

 

[scrabbler1]

The thing about Form 2210 which I have always found a little baffling is that it can change from when I fill it out at the start of the year (using my best guess as to income and ACA subsidy) versus when I fill it out at the end of the year (when income and ACA subsidy is known). I don't find out until the end of the year if I am going over the subsidy cliff until the 4th quarter, so at the start of the year I hit one of the STOPS at either Line 4 or Line 7. Even before the ACA, a big cap gain distribution might push my tax liability from just under $1,000 to just over $1,000, changing Line 7's STOP into a GO.


This isn't a form I where I can retroactively pay estimated taxes in an older quarter when I didn't believe I would have to make those payments at the time. Therefore, unless I get a large cap gain distribution midyear (which happened once), I make no estimated tax payments until the 4th quarter. I then pay in late December or late January about half of whatever the amount will be, and pay the rest in April.


I have never been questioned by the IRS of the state tax department, as I can't be the only person who is in this situation. Or I am just flying below the radar.

 

[kaneohe]

I'm not sure that's the case but at the moment I can't find it in the regs. AFAIK, if, for example, all your income arrives during 1Q, you have to pay the full estimate of tax on it by April 15. If you instead spread payments equally across the year, in an audit the IRS could say you underpaid during 1Q. For state estimated taxes, I can imagine this detail might vary from one state to another.

safe harbor are the magic words.............https://fairmark.com/general-taxation/estimated-tax/how-much/

 

[audreyh1]

We get income during the year but pay by withholding only once, the second or third week of December. Both Fed and State.

This is possible if you have access to withholding from the brokerage or bank. Folks not yet drawing from IRAs don’t usually have this opportunity.

 

[audreyh1]

The thing about Form 2210 which I have always found a little baffling is that it can change from when I fill it out at the start of the year (using my best guess as to income and ACA subsidy) versus when I fill it out at the end of the year (when income and ACA subsidy is known). I don't find out until the end of the year if I am going over the subsidy cliff until the 4th quarter, so at the start of the year I hit one of the STOPS at either Line 4 or Line 7. Even before the ACA, a big cap gain distribution might push my tax liability from just under $1,000 to just over $1,000, changing Line 7's STOP into a GO.


This isn't a form I where I can retroactively pay estimated taxes in an older quarter when I didn't believe I would have to make those payments at the time. Therefore, unless I get a large cap gain distribution midyear (which happened once), I make no estimated tax payments until the 4th quarter. I then pay in late December or late January about half of whatever the amount will be, and pay the rest in April.


I have never been questioned by the IRS of the state tax department, as I can't be the only person who is in this situation. Or I am just flying below the radar.

If I believe that my taxes owed will be about the same or higher than than the prior year, I use the prior year’s taxes x 1.1 / 4 to make equal quarterly payments.

If I believe that my taxes owed will be quite a bit lower than the prior year, I use the annualized income method for estimated taxes. This usually has me paying little during the year, and a big chunk on Jan 15 of the next. But since I’m doing pay as I go, I’m safe. It does require quite a bit more record keeping and some more complex spreadsheets, and filing form 2210, but I’m used to it.

 

[pb4uski]

^^^^ I used to do it this way and went to doing a tax-deferred withdrawal and withholding instead of estimated tax payments... no need to do the annualized income method... much easier.