Another quarterly estimated taxes question

[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]

Quote:

Originally Posted by GrayHare 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-taxatio...-tax/how-much/

[audreyh1]

Quote:

Originally Posted by OldShooter 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]

Quote:

Originally Posted by 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.

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.

[scrabbler1]

I have no taxes withheld during the year and have no opportunities to have taxes withheld, so the only ways I can pay them are through estimated taxes and when I file my return in April.

[audreyh1]

Quote:

Originally Posted by 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.

We don’t have the withholding option, and won’t for many more years.

[pb4uski]

One minor benefit of age I guess.

[racy]

Quote:

Originally Posted by pb4uski 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.

Am I understanding this correctly? You're withdrawing from your IRA the amount of your taxes due on taxable accounts?

[Dtail]

Quote:

Originally Posted by 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.

This is the methodology I will be using for my parents starting next year with their RMD's which they don't spend anyway.
Their tax guy has the estimated payments all over the place.

[Dtail]

Quote:

Originally Posted by pb4uski One minor benefit of age I guess.

Both you and @Audrey1 are under 70.
I assume you are going this route as part of your stated strategy of using your TIRA accounts for spending before 70 in order to reduce the tax torpedo.

[audreyh1]

I guess we could withdraw from our IRAs to cover estimated taxes, but that would increase our taxable income considerably, and at a much higher marginal tax rate.

I have only considered earlier withdrawals for a Roth conversions, but so far that has not made sense for us tax wise.

[gerntz]

Quote:

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

That's how we've always done it in retirement/no earned income. Never have made an estimated tax payment.

[Cobra9777]

Quote:

Originally Posted by 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.

We're too young for tax-deferred withdrawals. Even after 59.5, I'll still prioritize Roth conversions to the top of the 12% bracket. After 70, I'll do RMDs in Dec and withhold the whole year's tax.

We each have a small pension but elected no withholding. I make quarterly payments that are as small as possible, but just enough to avoid penalties. This takes some planning and spreadsheet work but it keeps me amused.

First few years of ER were a bit volatile, tax-wise. I was exercising all my remaining employee stock options for a few years. DW decided to keep working OMY*3, and then we sold some rental property. I've also been squeezing in Roth conversions where I can. The first "normal" year was 2018, which then introduced QBI and all the other changes to the code.

With all that going on, I was doing lots of tax planning and analysis anyway. So it was just easier to make quarterly estimated payments and we frequently had to use the annualized income method, especially years with stock options or real estate sales. With things being much more stable now, I might convert to withholding on the pensions just for simplicity. I thought about doing 100% withholding in Dec, but one of the two pensions requires paper forms and snail mail. So probably not practical.

[audreyh1]

Any tax withheld from a Roth conversion is treated as a regular distribution according to https://www.retirementdictionary.com...ra-conversions .

Quote:

Withheld Amount is Not A Conversion Any amount withheld as tax from a Roth IRA conversion is treated as a regular distribution. Example: John request to have the 401(k) balance of $100,000 converted to his Roth IRA. He instructed the plan administrator to withhold 20% for federal tax. As a result only $80,000 was credited to the Roth IRA and 20% was remitted to the IRS as a pre-payment of tax for John. The $20,000 that was withheld for tax is treated as a regular distribution and is subject to income tax and the 10% early distribution penalty on any taxable amount. The 10% early distribution penalty does not apply, if the conversion occurred when John was at least age 59 ½ of if john qualifies for one of the exception to the penalty.

So you lose the benefit of doing a full Roth conversion and paying taxes from after tax funds. And if you are younger than 59 1/2 you are subject to penalty on that withheld amount.

Some folks are drawing income from IRAs before RMD age, because for them that makes the most sense tax wise - they may not have much in after tax funds, and/or they may be drawing from IRAs for income and deferring social security. In such cases, being able withhold to pay estimated taxes is a bonus.

[OldShooter]

Quote:

Originally Posted by pb4uski Yup, division is hard. Your DW is an ex-banker... maybe she can help you out with the math.

She is no more interested in doing the work than you are:

Quote:

Originally Posted by 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.

[OldShooter]

Quote:

Originally Posted by audreyh1 Any tax withheld from a Roth conversion is treated as a regular distribution according to https://www.retirementdictionary.com...ra-conversions . So you lose the benefit of doing a full Roth conversion and paying taxes from after tax funds. ...

Huh? For any distribution I take at Schwab I can specify the amounts withheld for fed and state. Always zero until my December 100% withholding payment.

[audreyh1]

Quote:

Originally Posted by OldShooter Huh? For any distribution I take at Schwab I can specify the amounts withheld for fed and state. Always zero until my December 100% withholding payment.

You aren’t doing Roth conversions are you? Different ballgame.

[Cobra9777]

Quote:

Originally Posted by audreyh1 Any tax withheld from a Roth conversion is treated as a regular distribution according to https://www.retirementdictionary.com...ra-conversions . So you lose the benefit of doing a full Roth conversion and paying taxes from after tax funds. And if you are younger than 59 1/2 you are subject to penalty on that withheld amount...

Not sure if you were responding to my post (#34) or not... But we have no withholding on Roth conversions. All tax is paid from taxable funds. Perhaps you misunderstood something?

[RunningBum]

I think what Audrey is saying is that if you aren't required to take RMDs yet, and want to do Roth conversions, then using tIRA withdrawals to pay taxes via withholding may not be efficient. It's true that you can get the float of being able to convert or withdraw some early in the year and not pay taxes until the end of the year, but you also aren't converting the full amount of what you take out of your tIRA to a Roth.

In my mind, this is another version of "don't let the tax tail wag the dog": "Don't let the tax payment method was the dog."