I Bond Interest

[Rianne]

I cashed 3 of our I bonds in January 2024. We keep them in a lock box at the bank and have 7 more to cash sometime in the future. The interest was $28K on the 3 bonds. Can I wait until 2025 to pay taxes on that and not get a penalty? We've had them since the early 2000s. We bought 10 (10K) over 5 years. Our income will be dividends (ordinary $12K or so and 15K qualified) and about $2500 in consulting income for DH for 2024. I don't want a penalty. We paid estimated taxes for 2023 and 2024 but decided to cash those bonds.

 

[audreyh1]

It depends on other income and their taxes and withholding. But in general no.

However if you are already planning to pay estimated taxes (or have withholding) based on 2023 total taxes that meet the safe harbor rules in 2024 then you are already covered. It doesn’t matter how much additional taxable income you receive in 2024, you won’t owe the remainder until April 15 2025.

If not then you need to figure out your estimated taxes or withheld taxes strategy for 2024 if you want to avoid penalty.

Sounds like your other income isn’t that high. If it was about the same in 2023, then it makes sense just to follow the safe harbor rules based on your 2023 taxes - divide 2023 taxes by 4 and pay in 4 equal installments by the estimated tax due dates. Pay the remainder owed by April 15 2025.

 

[Rianne]

It depends on other income and their taxes and withholding. But in general no.

However if you are already planning to pay estimated taxes (or have withholding) based on 2023 total taxes that meet the safe harbor rules in 2024 then you are already covered. It doesn’t matter how much additional taxable income you receive in 2024, you won’t owe the remainder until April 15 2025.

If not then you need to figure out your estimated taxes or withheld taxes strategy for 2024 if you want to avoid penalty.

Sounds like your other income isn’t that high. If it was about the same in 2023, then it makes sense just to follow the safe harbor rules based on your 2023 taxes - divide 2023 taxes by 4 and pay in 4 equal installments by the estimated tax due dates. Pay the remainder owed April 15 2025.

Forgot, the only other income we'll have is my SS ($14K), I took it early. I funded our cash MM for the year 2024 expenses. No other income. Unless we decide to Roth convert. Not sure yet. I'm new at tax returns and have the Taxslayer practice software since I'm an AARP tax consultant. No more CPAs and their fees. This is a good learning experience and I'm plugging various scenarios in the practice software to see the effect. The I bond interest has me a bit confused.

 

[audreyh1]

The IBond interest is just additional ordinary income this year. Same as other interest for Federal Income Tax purposes.

Have you calculated your 2023 income taxes yet? Do you know what your estimated taxes (plus withheld taxes) need to be based on that (total taxes owed).

Then it’s simply a matter of determining whether that is lower than some other method such as the Annualized Income method of calculating estimated taxes each quarter based on income received each tax quarter this year.

 

[Rianne]

The IBond interest is just additional ordinary income this year. Same as other interest for Federal Income Tax purposes.

Have you calculated your 2023 income taxes yet? Do you know what your estimated taxes (plus withheld taxes) need to be based on that (total taxes owed).

Then it’s simply a matter of determining whether that is lower than some other method such as the Annualized Income method of calculating estimated taxes each quarter based on income received each tax quarter this year.

Thanks, waiting for CPA to complete the 2023. He's so slow and we pay him so much. I've learned my lesson about doing our own taxes. Interesting observation. I've completed about 50 tax returns so far, then they get reviewed by a senior tax professional, all volunteers. When the senior tax folks go over the returns, they sit down with the client and explain the various lines, and how they affect the bottom line. How credits and deductions affect income and AGI. I had to observe this process as I'll be reviewing next year. For frickin free! I get charged for an e-mail response from our CPA. The whole process takes about 2 hours if that. Depends how complicated. I'm data entering the numbers. The software walks you through. I'm still learning what line affects what results.

 

[Jerry1]

As Audrey indicated. Understand and apply the safe harbor rules and you’ll be fine. Understanding the safe harbor rules is job one to doing your own taxes. There’s a lot of other things the can be considered based on your individual situation, but keeping from paying a penalty (and interest) is essential.

 

[mrfeh]

As others have said, safe harbor rules can save you from a penalty.

That being said, in general, the IRS expects payment as the income is received throughout the year. Something to remember for future years.

 

[audreyh1]

As others have said, safe harbor rules can save you from a penalty.

That being said, in general, the IRS expects payment as the income is received throughout the year. Something to remember for future years.

That’s where the prior year safe harbor rule is so handy.

It doesn’t work well for the case when you have a major drop in income after a higher income and thus tax year, but otherwise it’s very handy. Doing the Annualized Income method is much more work and no software is available to calculate it for you, you had better be good with both spreadsheets and income tracking - no 1099s are available.

With the prior year taxes safe harbor rule you also have an opportunity for the final tax quarter of adjusting the amount so you won’t overpay for the tax year. By December you should know where you are (provided you can accurately track and/or estimate your income) and can reduce or even skip that Jan 15 payment if warranted.

 

[Gumby]

Technically, the safe harbor rule works just fine in a year where your income has dropped substantially. It's just that you will have paid/withheld a lot more than you needed to and will get a large refund. The other safe harbor is that you won't pay a penalty if you owe less than $1000, so make your best estimate and pay/withhold to within $1000 of that. I usually withhold to the exact amount of my estimate and am almost always within a few hundred dollars of my actual tax bill.

 

[audreyh1]

Technically, the safe harbor rule works just fine in a year where your income has dropped substantially. It's just that you will have paid/withheld a lot more than you needed to and will get a large refund. The other safe harbor is that you won't pay a penalty if you owe less than $1000, so make you best estimate and pay/withhold to within $1000 of that. I usually withhold to the exact amount of my estimate and am almost always within a few hundred dollars of my actual tax bill.

Well that’s my complaint. No way am I going to way overpay estimated taxes as I hate refunds, especially large refunds.

Fortunately (I guess) I’m past the years where our income varies that wildly especially as I’m taking steps to manage income close under a particular IRMAA level.

 

[Rianne]

Well that’s my complaint. No way am I going to way overpay estimated taxes as I hate refunds, especially large refunds.

Fortunately (I guess) I’m past the years where our income varies that wildly especially as I’m taking steps to manage income close under a particular IRMAA level.

Past years we couldn't control our income b/c DH consulting business. He could deduct % of household expenses. Every year income varied, we always paid estimated taxes and usually overpaid, then used that overpayment for the next year's estimated taxes. Starting in 2024, we will be able to control our income. We plan to sell an undetermined basis for stock we bought in the early 2000s. I'll have to go back historically to the date we bought it. Or I should say guess the date we bought it since it was purchased through the company. It's < $20K and that stock has not moved much in all these years.

 

[Koolau]

I hate quarterlies more than I hate refunds, so... YMMV