Basic question on paying estimated taxes

[WestwardBound]

I retired in 2019 and some deferred comp was paid in 2020. They withheld about 80% of the Federal and State estimated taxes I calculated I will owe based on my expected 2020 income.

Can I wait until later this year in 3Q or 4Q to make the remaining tax payments or do I need to do as soon as possible?

Thanks.

 

[pb4uski]

You'll have to work through the safe harbor amount, but if you're doing estimated payments then I'm guessing that you should probably do them earlier rather than later.

However, if you are over 59 1/2 , have tax deferred accounts that you can withdraw from and can absorb the extra income you could do a withdrawal for the amount you expect to owe (also factoring in the withdrawal) and have the entire amount withheld for Federal and state. For underpayment penalties, the IRS considers any withholding as having been paid evenly throughout the year even if it was all in December.

 

[kaneohe]

Assuming you don't meet any safe harbor , it is probably simpler to pay in equal quarterly payments. The 1st and 2nd quarterly payments (for federal) are due 7/15 this yr. This way you won't have fill out any forms.

If you like filling out tax forms, you can wait and pay your estimated taxes in Q3 and Q4. Check option D on the first page of F2210 https://www.irs.gov/pub/irs-pdf/f2210.pdf
to treat your withholding as paid when withheld..........I'm assuming in Q1?
Then you will have paid 80% in Q1 and can pay the rest in Q3 and Q4. But
you will have to file F2210 and show that your 80%/0%/10%/10% was paid faster than the 25%/25%/25%/25% that is required. This scheme doesn't work if your withholding was in Q2 since your Q1 payment will be considered late.

so simplicity vs some work ............your choice.

 

[Time2]

I'd like to know how this works. When I was self employed I paid my quarterlies, quarterly. As I should now! We are now retired, I have forgotten to pay any quarterlies

So, are this years quarterlies delayed because of covid?

Meaning I can just pay before 7/15 and I'll be fine??



I have earned about about $20,000 of investment income, but later in the year I expect to sell LTCGs to generate income for next year. I also expect to do some Roth conversions, so I will owe some taxes.

 

[PaunchyPirate]

I'd like to know how this works. When I was self employed I paid my quarterlies, quarterly. As I should now! We are now retired, I have forgotten to pay any quarterlies

So, are this years quarterlies delayed because of covid?

Meaning I can just pay before 7/15 and I'll be fine??



I have earned about about $20,000 of investment income, but later in the year I expect to sell LTCGs to generate income for next year. I also expect to do some Roth conversions, so I will owe some taxes.

Yes, both the Q1 and Q2 Deadlines for quarterly payments have been pushed to July 15 due to Covid. So pay before then and you should be fine. Unless the IRS pushes it back more.

 

[sakowitzm]

A quick follow-up on the same general topic: which takes precedence, Safe Harbor or equal payments? Here's what I mean. In Year X, I pay $10,000 in federal income tax. In Year X+1 my Federal income tax burden will also be $10,000, and I wait until January 15th of Year X+2 (the last date to pay estimated taxes for Year X+1) and at that time I pay in the full $10,000.

On the one hand, I did not pay estimated taxes equally throughout the year, and for that there should be a penalty.

On the other hand, I meet the Safe Harbor requirement by paying 100% of what I had paid the previous year.

So... will the IRS assess a penalty on me?

 

[pb4uski]

[-]No. See Form 2210. https://www.irs.gov/pub/irs-pdf/f2210.pdf

Line 14 would be zero or less.[/-]

Yes, they would.... you would have to make equal quarterly payments of $2,500/qtr. Also see post #11.

 

[sakowitzm]

Thanks.

 

[RunningBum]

I'm not going to take the time to go through 2210, but my understanding is that if you aren't using withholding, you have to either make even quarterly estimated payments, or show when income and deductions were incurred to show that your estimated payments were done properly.

My personal experience is one year making small estimated quarterly tax payments, and a large 4th quarter payment to match a late in the year Roth conversion. Turbo Tax showed an underpayment penalty until I broke out the quarterly income in 2210. Maybe rules have changed since then.

 

[pb4uski]

RB, my initial reaction was the same as yours, but walking through the form 2210 it seems that if you have paid an amount equal to last year's taxes through a combination of withholding and/or estimated payments that "you don't owe a penalty".

I was surprised too.

Generally, an underpayment penalty can be avoided if you use the safe harbor rule for payments described below. The IRS will not charge an underpayment penalty if you pay at least:

• 90% of the tax you owe for the current year, or
• 100% of the tax you owed for the previous tax year.

This rule is altered slightly for high-income taxpayers. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

However, if you do not pay at least that much via quarterly estimated payments, you may be subject to an underpayment penalty.

https://www.hrblock.com/tax-center/irs/tax-responsibilities/avoiding-underpayment-tax-penalty/

But I agree... it still doesn't smell right because I'm finding stuff that is contrary as well.

Do you need to pay in equal amounts?
Generally yes, but it's OK if some are larger than others due to irregular income. Most people calculate the safe harbor amount, add some wiggle rule, divide by four, and pay that amount. It's easier to calculate that way and it's just as safe from a tax perspective, just make sure to keep enough aside in case you have a good year and owe more come April.

 

[kaneohe]

No. See Form 2210. https://www.irs.gov/pub/irs-pdf/f2210.pdf

Line 14 would be zero or less.

Line 14 is the short method but at the top of that page is this:

"Can You Use the
Short Method?
You can use the short method if:
• You made no estimated tax payments (or your only payments were withheld
federal income tax), or
• You paid the same amount of estimated tax on each of the four payment
due dates."

I think you have to use the regular method which assumes even income and the expectation then is that the estimated tax will be the same = equal quarterly payments.

Electing to have withholding treated as paid when withheld will help the timing part as discussed above since the withholding will be early and the estimated payments can be later.

 

[pb4uski]

Ah... I see... good catch... so it has to be quarterly payments... that makes sense.

I corrected the erroneous post.

 

[sakowitzm]

So it sounds like the consensus is: YES, penalty. Quarterly payments take precedence over meeting Safe Harbor. Thanks all.

 

[scrabbler1]

I'm not sure how this fits into the discussion, but remember that F2210 is completed at the end of the year, while estimated tax payments are made during the year.


F2210 mimics, in part the same safe harbor tests shown in F1040-ES, the form used to calculate and pay estimated taxes. But F1040-ES is completed at the start of the year, and may be updated throughout the year, not solely at the end of the year.


In my case, I assumed at the start of the year (2019) that I would be able to post an ACA premium tax credit on my return. This credit would reduce my taxes due and put me directly into a safe harbor (<$1,000 owed), as shown on F2210, Line 4, and on F1040-ES, Line 14b.


But the ACA premium tax credit did not materialize because of a large cap gain in late December. Therefore, I got washed out of that safe harbor, so to speak. If I file F2210, at best I would check Box A requesting a waiver "for other reasons." Or, I don't check any boxes and don't file F2210 at all. Schedule AI won't help because it would reveal underpayment penalties for some of the earlier quarters even though I believed I would have been in the safe harbor the whole time.


So, I check no boxes and don't file the form, as I have done in prior years. I guess I fly under the IRS's radar because they have never contacted me about this (or, somehow, they have figured out I was in a safe harbor prior to the end of the year and did nothing wrong).

 

[mountainsoft]

My income varies from month to month, so I pay my estimated taxes monthly on the EFTPS web site. It only takes a couple minutes and I don't need to worry about quarterly or semi-annual payments. I know taxes are due the first of each month, just like taxes taken from a regular paycheck.