Estimated tax withholding and payment

[Rianne]

DH no longer has an LLC for his consulting business. He's fully retired. We used to pay quarterly earnings. Already paid for 2023 in 2022. We have not WD from our VG portfolio but will start in 2024.

What income do we have to prepay in quarterly installments for 2024? If we have no WD from tIRA and only sell some taxable stock and Ibonds, do we have to pay quarterly for this income? We plan to cash the Ibonds in Jan. 2024. The interest on those will be approx. $30K. Do I pay tax on that interest in the first quarter of 2024?

We're attempting to do our taxes in the future. We've always had an accountant. But everything will be simplified as we fully retire.

 

[audreyh1]

I think you need to read the IRS info on how to figure which also goes over when. Hopefully it also mentions the safe harbor rules. https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

 

[target2019]

I would have 10% minimum withheld from the iBond interest.

For withdrawals from a taxable brokerage, you can look at gains details for your holding. The specifics matter, so hard to guess. Maybe you have lots which are losses, and some that are gains.

Once you have the 2023 return complete (or almost) you'll have a better idea of a 2024 strategy. YMMV though.

 

[RunningBum]

I take the easy approach of dividing my previous year total tax (2023 in this case) by 4, and making 4 equal quarterly estimated payments via EFTPS. I do the same with state for their system. This gives me safe harbor from owing any penalty due to underpayment.

If you had a lot more tax in 2023 than you expect in 2024, safe harbor will make you prepay too much. Instead you may want to try one of the other ways, or just make an estimate of what your taxes are for each quarter, calculating income received that quarter and dividing the std deduction by 4. If you itemize you would use actual deductions each quarter. Basically you'd do form 2210 preemptively. As I write this out, I think the withholding method near the end of the year would be easier.

 

[mrfeh]

What income do we have to prepay in quarterly installments for 2024?

You're supposed to pay taxes as the income is received. ie. any income from Jan->Mar should be considered for the estimated tax payment due by 4/15.

Income from all sources (wages, capital gains, dividends, interest) is in play.

 

[Rianne]

I think you need to read the IRS info on how to figure which also goes over when. Hopefully it also mentions the safe harbor rules. https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

Got it, thanks. The bottom line, IRS wants taxes paid when income received, and the % paid is more or less a guestimate.

 

[audreyh1]

Got it, thanks. The bottom line, IRS wants taxes paid when income received, and the % paid is more or less a guestimate.

Yes, however there are some exceptions called safe harbor rules that can be to one’s advantage. For example, if your take your prior year total tax owed*, divide it by 4 and pay each quarterly at the estimated tax deadlines (taking into account any withholding done over the same period) then it doesn’t matter if your current year taxes are higher or when the income occurs. This can help when a high taxable income year follows a low taxable income year. You pay the remaining taxes owed the following April with no penalty.

*for MFJ with prior year AGI >150K you have to pay 110% of prior year taxes in 4 equal installments.

I’ve also used the annualized income (AI) method computing estimated taxes for each IRS quarter based on income received YTD, and it’s a lot more work with a short period to compute it.

 

[Rianne]

Yes, however there are some exceptions called safe harbor rules that can be to one’s advantage. For example, if your take your prior year total tax owed*, divide it by 4 and pay each quarterly at the estimated tax deadlines (taking into account any withholding done over the same period) then it doesn’t matter if your current year taxes are higher or when the income occurs. This can help when a high taxable income year follows a low taxable income year. You pay the remaining taxes owed the following April with no penalty.

*for MFJ with prior year AGI >150K you have to pay 110% of prior year taxes in 4 equal installments.

I’ve also used the annualized income (AI) method computing estimated taxes for each IRS quarter based on income received YTD, and it’s a lot more work with a short period to compute it.

Ok, as I visualize future income, I believe we can stay in the 12% tax bracket. We paid Medicare and SS taxes on DH LLC's income. No longer. All of our capital gains are long-term. Rode the wave and dips and did not sell or buy taxable investments. We reinvested dividends. All tIRA is in laddered CDs and treasuries. We plan to cash the interest as income and reinvest the principal starting in 2025 as laddered matures for the next 5-10 years. We may keep taxable index funds at 45% - no selling as SS for DH starts Jan. 2025. It's a plan I've worked out.
SS = $60K
Interest from tIRA = $40K. Simple. Of course, unless one of us dies.
If that's the case, SS drops to $35K. I'm going to assume one of us will spend less. This would keep one of us in the 12% bracket. The absolute worst-case scenario...RMDs to 85 yrs old remain in the 22% tax bracket.
Yet, plans are made to be broken.

 

[Jerry1]

Yes, however there are some exceptions called safe harbor rules that can be to one’s advantage. For example, if your take your prior year total tax owed*, divide it by 4 and pay each quarterly at the estimated tax deadlines (taking into account any withholding done over the same period) then it doesn’t matter if your current year taxes are higher or when the income occurs. This can help when a high taxable income year follows a low taxable income year. You pay the remaining taxes owed the following April with no penalty.

*for MFJ with prior year AGI >150K you have to pay 110% of prior year taxes in 4 equal installments.

I’ve also used the annualized income (AI) method computing estimated taxes for each IRS quarter based on income received YTD, and it’s a lot more work with a short period to compute it.

Agree with Audreyh1 - Anyone paying taxes should understand the safe harbor rules. There’s no reason to pay a penalty or interest if you understand the safe harbor rules. It also makes payment decisions around timing much easier.

 

[MarieIG]

I'll have enough in for safe harbor if I make a fourth "equal" payment (actually my first payment was more due to rolling over the refund), but for NYS I'll owe tax if I don't pay more the fourth quarter. (Now that I am no longer employed it is harder to have entities withhold state taxes than federal).

I would rather pay up right now, but I don't want to set off alarms by so doing. I'm actually thinking of slipping two estimated tax payments in the envelope in January.

 

[Rianne]

Agree with Audreyh1 - Anyone paying taxes should understand the safe harbor rules. There’s no reason to pay a penalty or interest if you understand the safe harbor rules. It also makes payment decisions around timing much easier.

I don't see our AGI exceeding $150K. Even with RMD at 85 yrs. old. Including dividends and SS. How I see it, in retirement, keep your income as low as possible. Isn't that what billionaires do?

 

[Finance Dave]

I don't see our AGI exceeding $150K. Even with RMD at 85 yrs. old. Including dividends and SS. How I see it, in retirement, keep your income as low as possible. Isn't that what billionaires do?

I wouldn't know what billionaires do, as I'm not one.

But you are right, keep income low!

We have an interesting situation coming at us. We sold 3 rentals in 2022 and looked "rich" in terms of income that year. As such, our CPA adjusted our estimated quarterly taxes (even though I told him we would not have anywhere near that income in 2023) and we were paying $7,700 ($6,000 Fed and $1,700 state) each payment (I think there are only 3 payments in the tax year?). Well, our income this year WAS much lower, so I'm guessing that we will get a rather large refund.

For 2024 and beyond things will be simpler, as we're out of the rental business and our income will be basically only a small pension I have and our tax-deferred withdrawals, which we can manage to minimize taxes.

 

[target2019]

I don't see our AGI exceeding $150K. Even with RMD at 85 yrs. old. Including dividends and SS. How I see it, in retirement, keep your income as low as possible. Isn't that what billionaires do?

I think it's "reportable income." They stuff Roth with startup options like reported here: https://www.fool.com/investing/2022..., Thiel's Roth IRA,largest IRA known to exist. And so on and so forth...

In your case when spouse no longer has consulting income you have a drop in income. So, if you use a Safe Harbor tax amount from the final consulting year, you'll overpay taxes the next year. But then you mentioned a large withdrawal of taxable interest. Yeah, it can feel complicated each year. But I think you can install a tax program, and input everything, and compare to what the tax preparer comes up with.

There are online H&R Block tax courses each year as well as classroom-led courses. That can help.

 

[audreyh1]

I wouldn't know what billionaires do, as I'm not one.

But you are right, keep income low!

We have an interesting situation coming at us. We sold 3 rentals in 2022 and looked "rich" in terms of income that year. As such, our CPA adjusted our estimated quarterly taxes (even though I told him we would not have anywhere near that income in 2023) and we were paying $7,700 ($6,000 Fed and $1,700 state) each payment (I think there are only 3 payments in the tax year?). Well, our income this year WAS much lower, so I'm guessing that we will get a rather large refund.

For 2024 and beyond things will be simpler, as we're out of the rental business and our income will be basically only a small pension I have and our tax-deferred withdrawals, which we can manage to minimize taxes.

If you are sure you have overpaid already then at least skip the forth estimated payment in Jan.

 

[Cobra9777]

The best way to pay for taxes is via withholdings because the IRS considers withholdings as done evenly throughout the year even if the withholding occurs on Dec 31...

+1

In late Dec every year, I withdraw our safe harbor amount from my tIRA with 100% withholding. For us, the lowest safe harbor is usually 90% of current year estimated tax. I pay the balance when I file in April. I also repay the tIRA withdrawal every Jan from taxable funds, and code it as a 60-day rollover. To get around the once-per-year rollover limitation, I alternate every year between my tIRA and DW's tIRA.

As pb4 stated, the IRS considers the late-Dec withholding to be paid equally through the year. I do the rollover because my intent is to use taxable funds to pay tax. The tIRA withdrawal is just a mechanism for withholding.

I've done quarterlies in the past. But I never liked overpaying based on 110% of prior year. So I ended up doing lots of current-year planning every quarter, which was time-consuming... and usually required the AI method to prove I wasn't underwithheld. The method I use now is far simpler, much better for cashflow, and I never pay a penalty.