Big tax bill & probably a penalty too - help!

[lucky penny]

I started doing my taxes on Turbotax & got a nasty shock. In past years I always withheld a lot, made no estimated payments & got a nice refund. This year, with RMDs & SS income starting last year, I knew things would be different but I thought I'd come out OK with modest withholding on the extra income. But boy was I wrong -- it looks like I'll owe Uncle Sam big time, around $7000!

Guess I should have done the math & figured that out ahead of time. (They call me Cleopatra since I'm the queen of denial....)

To avoid this next year, I'll ramp up withhholding on the extra income. Now I just gotta suck it up & write that check.

Question: what kind of penalty will they hit me with? Would it help if I just sent a big check now for an estimated payment? I'm not ready to file quite yet.

 

[LOL!]

There are quite a few "safe harbors", so that folks who have large changes in income do not get hit with penalties. You can google for them and tell us if you are OK. It should take less than 5 minutes.

 

[travelover]

LOL's right.

Generally, an underpayment penalty can be avoided if you make one of the safe harbor 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/

 

[aja8888]

I'm pretty sure Turbo Tax should have asked if you want the program to estimate the penalty. In any even, it's too late to make an estimated payment for 2017.

 

[kaneohe]

How Much to Pay

The prior yr safe harbor is probably the one most likely to work for you.
Even if you don't meet the requirements, send in the estimated payment ASAP.
Any penalty depends on how long you are delinquent.

 

[lucky penny]

Hmm, thanks, might not be so bad after all. I'll have to look at the numbers. With more income last year, I probably paid more than 110% of last year's total.

I haven't yet gotten to the end of Turbotax where they calculate penalties. (I remember that from an earlier year where they once told me I owed a $4 penalty on my state taxes.)

Live and learn.

 

[pb4uski]

One thing to look into is the annualized income method, particularly if your RMD was late in the year. Essentially, you do an analysis to see if your year-to-date income as of 3/31, 5/31, 8/31 and 12/31 would have resulted in taxes due more than your YTD estimated payments and withholdings. If your RMD was after 8/31, you may owe very little penalty.

 

[audreyh1]

Yeah, check your safe harbor. If you paid 110% of 2016 taxes you are golden.

Well, if you paid them in equal installments by the estimated tax deadlines, or your withholding during 2017 covered it. You might need to file form 2210 otherwise.

If not, you can make up the difference now and reduce your penalty.

If it’s a small penalty don’t worry about it.

 

[audreyh1]

I'm pretty sure Turbo Tax should have asked if you want the program to estimate the penalty. In any even, it's too late to make an estimated payment for 2017.

You can still submit one. You might end up owing a penalty on the few days since Jan 17.

 

[audreyh1]

One thing to look into is the annualized income method, particularly if your RMD was late in the year. Essentially, you do an analysis to see if your year-to-date income as of 3/31, 5/31, 8/31 and 12/31 would have resulted in taxes due more than your YTD estimated payments and withholdings. If your RMD was after 8/31, you may owe very little penalty.

Right. IF the RMD was received after 8/31, then taxes weren’t owed on it until 1/17/18.

To actually calculate the taxes owed, you have to multiply the 3/31 income by 4, calculate the taxes owed on it, then pay 22.5% of the calculated taxes owed, or 1/4 of prior years taxes, whichever is less. There are other multiples to use for each othe the other quarters.

 

[kgtest]

Right. IF the RMD was received after 8/31, then taxes weren’t owed on it until 1/17/18.

To actually calculate the taxes owed, you have to multiply the 3/31 income by 4, calculate the taxes owed on it, then pay 22.5% of the calculated taxes owed, or 1/4 of prior years taxes, whichever is less. There are other multiples to use for each othe the other quarters.

Question, not to hijack

If you chose to delay RMD, situation is bday on 10/27/51. Delay 1st RMD until 4/17/23 based off balance in 12/22 and IRS year after 70 1/2 rule.

Then take the second RMD for 2023 before end of year 12/29/2023 also based off 12/22 balance would you need to make an estimated payment early, or just wait until you file the following 4/15/24?

Sorry for the hijack i may be able to google this one, but felt this was a great time to ask since its in this thread.

 

[kaneohe]

Question, not to hijack

If you chose to delay RMD, situation is bday on 10/27/51. Delay 1st RMD until 4/17/23 based off balance in 12/22 and IRS year after 70 1/2 rule.

Then take the second RMD for 2023 before end of year 12/29/2023 also based off 12/22 balance would you need to make an estimated payment early, or just wait until you file the following 4/15/24?

Sorry for the hijack i may be able to google this one, but felt this was a great time to ask since its in this thread.

https://www.irahelp.com/slottreport/when-must-you-take-your-first-required-minimum-distribution

When you delay the first RMD, the deadline is April 1 , not the tax filing deadline.

The rest is just my guess........bday 10/27/51; you are 70.5 in 2022 when RMD is due. I believe your 2022 RMD is based on yr end 2021 balance and use age 71 factor. You can delay paying this until 4/1//23 I think you use the same factors as if paying in 2022. The RMD for 2023 would be based on yr end 2022 balance and use age 72 factor.

When you pay the est. tax for the 2nd RMD depends on whether you have a safe harbor or not but generally not later than mid Jan 2024.

 

[kgtest]

https://www.irahelp.com/slottreport/when-must-you-take-your-first-required-minimum-distribution

When you delay the first RMD, the deadline is April 1 , not the tax filing deadline.

The rest is just my guess........bday 10/27/51; you are 70.5 in 2022 when RMD is due. I believe your 2022 RMD is based on yr end 2021 balance and use age 71 factor. You can delay paying this until 4/1//23 I think you use the same factors as if paying in 2022. The RMD for 2023 would be based on yr end 2022 balance and use age 72 factor.

When you pay the est. tax for the 2nd RMD depends on whether you have a safe harbor or not but generally not later than mid Jan 2024.

Thank you. I need to read up on pros vs cons of safe harbor. Good catch on the 4/1 delayed RMD date. This info was for a friend I am still in accumulation and have 34 yrs before my RMD comes assuming govt doesn't change the dates.

 

[lucky penny]

Thanks to all. I'm unfamiliar with the annualized income approach, but since I took my entire RMD in December & plan to do that in the future, it sounds like that would be beneficial. Is that something I have to calculate on my return, or will the IRS (or Turbotax) do it in calculating the possible penalty?

 

[audreyh1]

Question, not to hijack

If you chose to delay RMD, situation is bday on 10/27/51. Delay 1st RMD until 4/17/23 based off balance in 12/22 and IRS year after 70 1/2 rule.

Then take the second RMD for 2023 before end of year 12/29/2023 also based off 12/22 balance would you need to make an estimated payment early, or just wait until you file the following 4/15/24?

Sorry for the hijack i may be able to google this one, but felt this was a great time to ask since its in this thread.

Personally I would never take two RMDs in the same year because it would push my marginal tax rate higher.

If I expect a high jump in income one year, I use the safe harbor rule based on 110% of the prior years taxes and pay in 4 installments by the quarterly estimated tax deadlines and then pay the balance on 4/15.

 

[Animorph]

Haven't seen anyone mention withholding taxes from the RMD at the time of withdrawal. Too late for OP of course, but as an official withholding payment it counts as being paid equally throughout the year. Easier than estimated taxes, though you still have to hit a safe harbor amount or estimate your taxes to figure out how much to withhold.

I have done the annualized income method a couple of years when I had unexpected income late in the year. It's a pain in the rear tracking down the dates of all income, including capital gains, and calculating your taxes four times. But it might save you money.

I think there has been several people here who routinely paid the under payment penalty because it was so small while interest rates are low. It may not be enough to make any extra tax work worth it.

 

[audreyh1]

Thanks to all. I'm unfamiliar with the annualized income approach, but since I took my entire RMD in December & plan to do that in the future, it sounds like that would be beneficial. Is that something I have to calculate on my return, or will the IRS (or Turbotax) do it in calculating the possible penalty?

TurboTax should calculate any penalty. You may have to supply your YTD income received up to 3/31, 5/31, and 8/31 in order for in to fill out form 2210, but if all your taxes paid were through withholding, and you did withhold at least 110% of prior years taxes, this may not be necessary.

 

[Peter]

The 'penalty' isn't what I would call 'punitive'. You can think of it as the interest that the IRS could have earned if you paid the right amount on time. Of course we would all rather not pay anything extra, but in my opinion it's not worth losing sleep over.

 

[RobbieB]

I'm gonna have me a big tax bill too, like 20 grand.

No penalty though, I prepaid last years bill -

 

[RunningBum]

Question about that 100 or 110% safe harbor rule. What if you paid 0 in taxes the previous year? Does that mean you could actually get away with no quarterly payments, and just pay your tax bill before April 15?

 

[cathy63]

Question about that 100 or 110% safe harbor rule. What if you paid 0 in taxes the previous year? Does that mean you could actually get away with no quarterly payments, and just pay your tax bill before April 15?

Yes, you do not have to pay estimated taxes if you had no tax liability for the prior year.