A little help with estimated taxes, please...

[flotsamandjetsam]

So, I had a windfall from the sale of a business interest at the end of 2011.)) I invested most of it in Vanguard funds. Our tax landscape is altered and I need to recalibrate our estimated tax payments. Since our taxes will be substantially lower this year, we don't have a safe-harbor option available.

What I did was look up the yield for each fund in the most recent annual fund report. Then I found the Vanguard page that shows the percentage of qualified dividend income (QDI) for each fund.

Crunch-crunch in a spreadsheet and I have a projection of ordinary income and 15% dividend income from our investments. There is also one tax-exempt bond fund in there to account for. I am not sure what to use for an effective tax rate for the non-QDI income. Something like 25% (we are both still working).

Is this a reasonable approach? I will handle any CG transactions that come up during the year. Divide by 4 and send the checks? I will round the payments up a little to be safe.

TIA. -F&J

 

[Gotadimple]

If you use tax software such as Turbo Tax or TaxAct, you can enter your details and see the impact. The important thing is to get a flow of payments to the IRS. Yes, those can be quarterly, but you can set up an account on EFTPS (at IRS.com) and have money deducted monthly from your bank, if you prefer.

-- Rita

 

[MichaelB]

I also use turbotax to estimate taxes. The tax tables will change with CPI and tax regs may also change, but it has provided the most reliable estimates so far.

 

[flotsamandjetsam]

Thanks, Rita. I use TurboTax...

but it seems to base estimated taxes on previous year data. My problem is that my previous year data is not valid for projecting 2012 taxes.

 

[Alan]

If you use tax software such as Turbo Tax or TaxAct, you can enter your details and see the impact. The important thing is to get a flow of payments to the IRS. Yes, those can be quarterly, but you can set up an account on EFTPS (at IRS.com) and have money deducted monthly from your bank, if you prefer.

-- Rita

+1

 

[audreyh1]

Predicting income from investments is hard, especially if you get larger distributions at the end of the year. But your back-of-envelope sounds reasonable.

Otherwise, you can use the Annualized Income (AI) Method. This requires you have your income and taxes paid YTD info from all sources including your salary.
Income Jan - Mar: multiply by 4 to get AI to compute taxes, 22.5% of tax due on April 15.
Income Jan - May: multiply by 2.4 to get AI to compute taxes, 45% of tax due on June 15.
Income Jan - Aug: multiply by 1.4 to get AI to compute taxes, 67.5% of tax due on Sept 15.
Income Jan - Dec: compute taxes (no multiplier), 90% of tax due on Jan 15 of the next year.

You can get the latest tables, exemptions and exact due dates from the 2012 publication f1040es.pdf available from irs.gov.

Has something changed? I didn't used to be able to use Turbo Tax to do estimated taxes. Do you mean just use last year's program with this years numbers? That doesn't take into account the multipliers required for the AI method. Maybe I missed something.

Audrey

 

[Nords]

but it seems to base estimated taxes on previous year data. My problem is that my previous year data is not valid for projecting 2012 taxes.

Actually last year's data is valid.

When you read IRS Pub 505 (http://www.irs.gov/pub/irs-pdf/p505.pdf), there's a chart in chapter 2 (page 18) that allows you to base next year's estimated tax payments on 100% or 110% of last year's estimated tax payments.

There's no reason to pay all of the current year's estimated taxes if you're allowed to base it on last year's tax bill.

 

[audreyh1]

Actually last year's data is valid.

When you read IRS Pub 505 (http://www.irs.gov/pub/irs-pdf/p505.pdf), there's a chart in chapter 2 (page 18) that allows you to base next year's estimated tax payments on 100% or 110% of last year's estimated tax payments.

There's no reason to pay all of the current year's estimated taxes if you're allowed to base it on last year's tax bill.

She had a BIG tax bill last year due to her windfall and doesn't expect this years taxes to be nearly as high.

Audrey

 

[flotsamandjetsam]

Has something changed? I didn't used to be able to use Turbo Tax to do estimated taxes. Do you mean just use last year's program with this years numbers? That doesn't take into account the multipliers required for the AI method. Maybe I missed something.
Audrey

Yes, Turbotax spits out est. tax payments when I print our return. I always wonder how they come up with the numbers.

 

[flotsamandjetsam]

Otherwise, you can use the Annualized Income (AI) Method. This requires you have your income and taxes paid YTD info from all sources including your salary.
Income Jan - Mar: multiply by 4 to get AI to compute taxes, 22.5% of tax due on April 15.
Income Jan - May: multiply by 2.4 to get AI to compute taxes, 45% of tax due on June 15.
Income Jan - Aug: multiply by 1.4 to get AI to compute taxes, 67.5% of tax due on Sept 15.
Income Jan - Dec: compute taxes (no multiplier), 90% of tax due on Jan 15 of the next year.
Audrey

This is what I need to do. Thanks!

 

[bizlady]

Turbotax has a section that you can use to project income for this year. It loads 2011 actual, and you can use that as a guide to enter 2012. It is a two part worksheet, that actually works pretty well. State available also. Had to search for it, but did finally find it..

 

[audreyh1]

Yes, Turbotax spits out est. tax payments when I print our return. I always wonder how they come up with the numbers.

Those numbers are 100% of last years taxes divided by 4 if last years income was below $150,000 (married, filing jointly), and 110% of last year's taxes divided by 4 otherwise.

Audrey

 

[audreyh1]

Turbotax has a section that you can use to project income for this year. It loads 2011 actual, and you can use that as a guide to enter 2012. It is a two part worksheet, that actually works pretty well. State available also. Had to search for it, but did finally find it..

Prior year income does not help many of us with only investment income from mutual funds. Distributions from mutual funds are highly variable year to year. And whether you decide to realize any capital gains or losses by selling investments is also totally unpredictable year to year.

Using last year's income works fine for people with pension or SS income, and for those taking regular IRA withdrawals.

Audrey

 

[audreyh1]

This is what I need to do. Thanks!

Publication 505 is actually the one that goes into the nitty gritty details of using the AI method, but it won't have current year tax tables. The 1040es document is updated early in the year with the current year tax tables, deductions, etc.

 

[meierlde]

Actually if interest rates stay where they are the penalty is not that great. Checking this year if you pay the same estimated tax on the 4 dates, the penalty is 2.2%. If the estimated payments are made in different amounts it is 4% of the april 17, 2.4% of the june 15 underpayment, 1.5% of the sept 15 underpayment and 1% of the jan 15 underpayment. This is because interest rates are so low right now.
Note that turbo tax allows one to enter the estimates for the year on the 1040es form.
So in any case with the interest being so small, just guess, and likley you will not owe that big a penalty in the worst case.

 

[Nords]

She had a BIG tax bill last year due to her windfall and doesn't expect this years taxes to be nearly as high.
Audrey

Y'know, I thought we were talking about the January payment on 2011 taxes. I missed that 2012 part. Sorry.

Yes, Turbotax spits out est. tax payments when I print our return. I always wonder how they come up with the numbers.

As another poster mentioned, this year's version of TurboTax lets you enter different numbers for 2012 income.

I like the 1040 AI worksheet for lumpy income. But if it's regular income then you can use TurboTax and let it do the dividing by four...

 

[kaneohe]

Since you are both working and have, I assume, withholding from your wages, you might be able to use the safe harbor of 90% of this yrs taxes
w/o doing estimated tax payments. You'll have to make an educated guess as to your estimated income for the yr and review that during the yr. Then adjust your withholding during the yr as things change. You may end up having to withhold everything in the last few months but because IRS treats withholding as being withheld evenly throughout the yr (even if it isn't), you might get away w/o a penalty provided you can withhold the correct amount by yr end.

 

[obgyn65]

Just a thank you note to all those who keep answering questions on this website. I am impressed with the level of financial expertise of some of our members.

 

[flotsamandjetsam]

Just a thank you note to all those who keep answering questions on this website. I am impressed with the level of financial expertise of some of our members.

+1

And thanks to all who helped me out with my estimated tax question. I have a much better idea what to do now.

F&J

 

[audreyh1]

Since you are both working and have, I assume, withholding from your wages, you might be able to use the safe harbor of 90% of this yrs taxes
w/o doing estimated tax payments. You'll have to make an educated guess as to your estimated income for the yr and review that during the yr. Then adjust your withholding during the yr as things change. You may end up having to withhold everything in the last few months but because IRS treats withholding as being withheld evenly throughout the yr (even if it isn't), you might get away w/o a penalty provided you can withhold the correct amount by yr end.

I agree that if you can get your company to do the correct extra withholding by the end of the year you will be OK.

 

[flotsamandjetsam]

Since you are both working and have, I assume, withholding from your wages, you might be able to use the safe harbor of 90% of this yrs taxes
w/o doing estimated tax payments. You'll have to make an educated guess as to your estimated income for the yr and review that during the yr. Then adjust your withholding during the yr as things change. You may end up having to withhold everything in the last few months but because IRS treats withholding as being withheld evenly throughout the yr (even if it isn't), you might get away w/o a penalty provided you can withhold the correct amount by yr end.

Thanks. I had to read this twice before I understood it. This is a way to correct for underpaying estimated taxes earlier in the year.

 

[Gotadimple]

Just a thank you note to all those who keep answering questions on this website. I am impressed with the level of financial expertise of some of our members.

Gosh! Thanks for the compliment.

I have a philosophy: Whose money is it, anyway?