Estimated tax, catchup withholding and penalties

[Midpack]

I overpay a little making the same Fed and State estimated taxes and the same Roth conversion amounts for the 1st, 2nd and 3rd quarter every year. Then I get serious about nailing down my best estimate for what taxes will actually be due for year in December after our last dividends/STCG's and do a final precise Roth conversion amount in late Dec and precise estimated taxes by Jan 15. I track dividends, CGs, interest, conversion/distributions throughout the year but I don't bother to make precise tax payments or conversions in the first three quarters. YMMV

 

[MarieIG]

Well, I'm coming up to my Roth conversion limit - but am going to try to figure out my total income for the year (to the best of my ability), so that I can push my conversions up to fill up any "space" allowed by taxes I already paid (plus my fourth quarter of estimated taxes). This looks to be the best year for us to convert. Me retired, and DH starting Medicare in two years (but will not be IRMAA'd for the full year.)

I have a general idea (and Vanguard is very good at posting income (TD Ameritrade not so much, I will call them). I "lost" space to convert created by interest income due to purchasing bonds, and "gained" space due to tax loss harvesting. I lost space to convert on a State level due to the sale of the marital house (and moving into inherited home) due to not paying property tax, but don't miss the expense of that huge property tax.

Had I given it more thought, I would have converted up to the limit of the tax bracket - but I'm less than perfect, and don't want to let the perfect be the enemy of the good - so I'll do the best I can.

 

[Montecfo]

In some years, when I completed the Estimated Tax worksheet at the start of the year, my projected income tax bill was around $800. This meant I hit a safe harbor (under $1,000 tax) and stopped at Line 14b of that form. No Form 2210. No estimated tax due. No taxes withheld, either.



But late December, I'd get an unexpected cap gain distribution which boosted my tax bill to $1,100. If I then filed Form 2210, it would show I owed some taxes in the first 3 quarters despite the highly skewed nature of my income. There is no way I'd file Form 2210 and expose this because the worksheet I filled out a year earlier indicated I owed nothing at the time in any quarter.



I'd simply fly under the IRS's radar by sending them about half of what I owed in estimated taxes, around $600, by January 15th. Then I'd pay the rest in April. I did this several years and never got questioned. I suppose with such small amounts involved, the IRS doesn't really care as long as the return is otherwise correct and I am paying what I owe.

I doubt you are flying under the radar. You probably paid 90 percent of tax due or met the prior year safe harbor.

 

[Montecfo]

Thanks.

I do lumped-in tax payments at the end of the year, but thought it was permissible because the IRS got only a year-end summary from the trustee.

It's surprising that IRA owners get a lenient treatment, even though their withdrawals as you say can be easily tracked to make sure taxes are withheld on a timely basis.

On the other hand, other income earners are faced with more paperwork for quarterly payments.

It is not any more lenient than wage earners. it's just the law as it pertains to withholding.

 

[Trooper]

Seriously, the safe harbor rules do make this easy. A lot of retired folks follow those because their taxable income doesn’t vary much and the rules are almost no brainers.



My taxable income varies a lot, so I spend more time on it. But this year I used the safe harbor rule to pay for the first 3 estimated quarterly payments, and didn’t think about it at all, once we completed 2021 taxes. I also preschedule estimated tax payments via EFTPS, so convenient.

This

 

[MarieIG]

It is not any more lenient than wage earners. it's just the law as it pertains to withholding.

Wage earners can choose to jack-up their withholding at the end of the year as well. I have done that in the past, taking home nada for the last two months of the year. (I would tend to front end my Roth 401k).

 

[scrabbler1]

I doubt you are flying under the radar. You probably paid 90 percent of tax due or met the prior year safe harbor.

Nope. When I return to the worksheet of the estimated tax form (1040-ES) at the end of the year (12/31/xx), I fail to meet any of the safe harbor provisions. I have had zero taxes withheld the entire year, paid zero in estimated taxes through the first 3 quarters, and owe more than $1,000 (due to the December CGD), of which I pay about half for the 4th quarter estimated taxes in January, just to get my April balance well under $1,000.

 

[SecondCor521]

If you owe the IRS more than $1000 in taxes and did not withhold or pay as estimated taxes more than 90% or 100% (depending on your income) of the amount of your tax owed last year (the so called "safe harbor" amount), you will be subject to an underpayment penalty by the IRS (in addition to the taxes due).

The above is close to correct but not quite.

There are three (or four) safe harbor rules:

1. Owe less than $1K.

2. Paid 90% of the current year tax.

3. Paid 100% (or 110% for high earners) of the previous year tax.

4. Had zero tax liability for the previous year, US citizen, and the previous tax return covered a full 12 month period.

(Even these are an approximation of the actual rules, which get very detailed.)

Note, therefore, that for a typical taxpayer, there are three different "safe harbor amounts" every year.

...

Also, I'm fairly certain that the rollover rule is one indirect rollover in any 12 month period. So an indirect rollover in June 2022 and another indirect rollover in July 2023 would be OK, but an indirect rollover in December 2021 and another indirect rollover in November 2022 would not be OK. In other words, it's a rolling 12 month limitation, not a once per calendar or tax year limitation.

 

[Montecfo]

Nope. When I return to the worksheet of the estimated tax form (1040-ES) at the end of the year (12/31/xx), I fail to meet any of the safe harbor provisions. I have had zero taxes withheld the entire year, paid zero in estimated taxes through the first 3 quarters, and owe more than $1,000 (due to the December CGD), of which I pay about half for the 4th quarter estimated taxes in January, just to get my April balance well under $1,000.

But you would have paid in an amount equal to last year's tax, correct?

If not you owe the penalty and should expect an IRS notice to that effect at some point.

 

[RunningBum]

Back in college, I had a job as a contractor for a year. The company didn't withhold anything. I knew taxes were coming so I set aside that money, and sent it in with my return. I had no notion of quarterly payments.

Within a year or two, I got a letter from the IRS telling me how much I owed in penalties. I remember feeling like it wasn't fair, but begrudgingly knew I should've at least asked someone about this.

It couldn't have been much, maybe on the wrong side of $1000 and maybe that safe harbor didn't exist in the early 80s. Anyway, this taught me you can't rely on flying under the radar if it's something that is easily flagged.

 

[SecondCor521]

But you would have paid in an amount equal to last year's tax, correct?

If not you owe the penalty and should expect an IRS notice to that effect at some point.

Not necessarily. I'm fairly sure if they met the safe harbor for the first three quarters and made an estimated payment in the 4th quarter to meet the safe harbor, they'd be fine. They might need to fill out Schedule AI on Form 2210 (which is a pain) to prove it, but earning "most" of your income in the 4th quarter and making a single 4th quarter estimated payment to cover it should be fine.

 

[Montecfo]

Not necessarily. I'm fairly sure if they met the safe harbor for the first three quarters and made an estimated payment in the 4th quarter to meet the safe harbor, they'd be fine. They might need to fill out Schedule AI on Form 2210 (which is a pain) to prove it, but earning "most" of your income in the 4th quarter and making a single 4th quarter estimated payment to cover it should be fine.

Well if you followed the exchange, we are making the same point, being that he is not "flying under the radar". He either met a safe harbor or will likely hear from IRS eventually.

 

[SecondCor521]

Well if you followed the exchange, we are making the same point, being that he is not "flying under the radar". He either met a safe harbor or will likely hear from IRS eventually.

Yes, I agree that he either met a safe harbor or might hear from the IRS.

However, my rather minor and slightly different point was that there are other ways to meet the safe harbor besides the way you described.

 

[Montecfo]

Yes, I agree that he either met a safe harbor or might hear from the IRS.

However, my rather minor and slightly different point was that there are other ways to meet the safe harbor besides the way you described.

He stated he did not meet any of the safe harbors as set forth in his worksheet. I simply challenged one of them.

 

[SecondCor521]

He stated he did not meet any of the safe harbors as set forth in his worksheet. I simply challenged one of them.

Yeah, I read all that. I think I understood it also.

Never mind, I'll stop trying to explain my point. It's not really that big of a deal.

 

[Kayzmum]

At the advice of our accountant --

we've been having Federal taxes withdrawn from my husband's Social Security every month. He retired about 7 years ago. I just retired in July of this year so I really appreciate this thread as a reminder to make adjustments, if needed, before the end of the year. We probably owe less taxes now, but I want to be sure.

 

[pb4uski]

I have to think about the strategy because it does sound odd to pay your taxes while increasing income at the same time.

You just have to plan for it.

 

[audreyh1]

I have to think about the strategy because it does sound odd to pay your taxes while increasing income at the same time.

Yeah, that bugs me too.

 

[Jerry1]

I do a tIRA withdrawal each December for our safe harbor amount, instructing Fidelity to withhold 100%.

I'm thinking about doing this. Seems like it would be a lot easier than worrying about estimated payments. I also like the idea of not having anything withheld from my pension or SS throughout the year. It also relieves me from trying to figure out what my taxes are at year end. I really have no need to hit the mark precisely. Plus, starting next year me and DW are starting SS so we'll be at the top of the 12% bracket and I won't be doing any further ROTH conversions.

 

[pb4uski]

Not necessarily. I'm fairly sure if they met the safe harbor for the first three quarters and made an estimated payment in the 4th quarter to meet the safe harbor, they'd be fine. They might need to fill out Schedule AI on Form 2210 (which is a pain) to prove it, but earning "most" of your income in the 4th quarter and making a single 4th quarter estimated payment to cover it should be fine.

+1. I did that for a few years because without a Roth conversion we would have owed nothing and I did my Roth conversions in December and made a December estimated payment for taxes so I needed to do a Form 2210, Schedule AI to prove that I paid taxes commensurate with my tax obligation.

Then I smartened up. Now I do the large part of my Roth conversion in early January and have taxes withheld from my pension over the year and top up the Roth conversion in December.

 

[scrabbler1]

Again, my point is that when I completed the 1040-ES worksheet at the start of the year, I was in a safe harbor because my projected tax bill was going to be under $1,000. But a large CGD at the end of the year pushed me over $1,000 due. Including Form 2210, Schedule AI, would expose me to unjustified penalties for underpayment of estimated taxes for the earlier quarters.

Looking at the instruction booklet for Form 1040, Line 38, I see a new definition of a safe harbor not shown in Form 1040-ES. It says if Line 37 (actual amount due, net of all withholding and estimated tax payments) is over $1,000, then I may owe a penalty. [Or, if I made any late estimated tax payments.] This standard is different from 1040-ES because in 1040-ES the $1,000 tax due safe harbor compares only withholding to taxes due. I am far from being 90% "in" through estimated taxes plus my zero withholding.

So, with this additional safe harbor provision, it looks like I am actually in a safe harbor as long as I get my taxes due under $1,000 at the end of the year in any way possible. There is no check in the 1040-ES worksheet which compares the total of (taxes withheld+estimated) taxes to $1,000 as a safe harbor provision.

So, I may not be flying under any IRS radar, as long as they can determine (correctly) that my original $1,200 tax liability did not require me to make any estimated tax payments in the first 3 quarters. Or they just see I kept my final payment under $1,000 and didn't care.

But, not including this instruction booklet's broader safe harbor rule in form 1040-ES may wrongly convince some people that they should make additional estimated tax payments or make them for more money.

 

[MarieIG]

When I say "fly under the radar" I don't mean not pay taxes owed or deliberately underpay. I mean I prefer not to undergo the stress and expense of an audit - and having to prove I did everything properly.

 

[MarieIG]

+1. I did that for a few years because without a Roth conversion we would have owed nothing and I did my Roth conversions in December and made a December estimated payment for taxes so I needed to do a Form 2210, Schedule AI to prove that I paid taxes commensurate with my tax obligation.

Then I smartened up. Now I do the large part of my Roth conversion in early January and have taxes withheld from my pension over the year and top up the Roth conversion in December.

I may copy this. I have always had taxes withheld from DH's pension and paid estimated taxes; but I may frontload my Roth conversion next year, and "settle-up" via additional withholding in December.

 

[audreyh1]

+1. I did that for a few years because without a Roth conversion we would have owed nothing and I did my Roth conversions in December and made a December estimated payment for taxes so I needed to do a Form 2210, Schedule AI to prove that I paid taxes commensurate with my tax obligation.

Then I smartened up. Now I do the large part of my Roth conversion in early January and have taxes withheld from my pension over the year and top up the Roth conversion in December.

That sounds like an interesting technique, except that I have no pension.