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Confused about estimating tax payments
Old 08-13-2022, 01:02 PM   #1
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Confused about estimating tax payments

I retired this year and can't figure out when income needs estimated tax payments.

I've received some interest in my investment accounts and not paid any estimated tax because my current income total to date doesn't exceed the taxes that were already withheld this year (by my employer pre-retirement date in March), but if I receive enough taxable distribution income in December that pushes me into needing to pay taxes, does that mean I will be penalized for not having paid estimated taxes this summer on the interest? I'm completely clueless about how to predict what dividend and cap gains distributions will show up in December.

And if I get a distribution in the investment account in December and it was so big that it would cause my Social Security income to become partly taxable, would the IRS expect that I should have paid taxes on SS throughout the year even if I didn't know until December that I would have income?

I think I've read on these boards that a person is safe if they pay the same taxes as the previous year, but I don't want to do that because I was fully employed last year and paid a LOT of taxes last year.
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Old 08-13-2022, 01:45 PM   #2
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Quote:
Originally Posted by UpQuark View Post
...my current income total to date doesn't exceed the taxes that were already withheld this year....
Do you mean the amount withheld exceeds the tax that would be due on your income total to date?

Quote:
...if I receive enough taxable distribution income in December that pushes me into needing to pay taxes, does that mean I will be penalized for not having paid estimated taxes this summer on the interest?
If you don't fit into any of the Safe harbors, then yes that's a possibility. Note that one of the safe harbors is "owing less than $1000", so if your withholding was enough that your payment when filing is under $1K you'll be fine.

Quote:
I'm completely clueless about how to predict what dividend and cap gains distributions will show up in December.
Using last year's numbers (unless your investments have changed substantially) should be a start.

Quote:
And if I get a distribution in the investment account in December and it was so big that it would cause my Social Security income to become partly taxable, would the IRS expect that I should have paid taxes on SS throughout the year even if I didn't know until December that I would have income?
Yes.

Spending a little time with one or more Tax estimation tools might be useful.

Also note that underpayment penalties may be much less onerous than the word "penalties" suggests, depending on just how much you underpaid.
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Old 08-13-2022, 01:57 PM   #3
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Additionally, if you receive you income substantially unevenly through the year, such as distributions in December, you may be able to mitigate or eliminate you under withholding penalty by computing any penalty by filing Form 2210 and Schedule Al where you calculate the tax withholding requirements based on your income received in each quarter of the tax year.

The Schedule AL is a bit of a pain to fill out. Keep good records of when you received income throughout the year.
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Old 08-13-2022, 02:21 PM   #4
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All great suggestions. Iíll add that end of year capital gains and dividends come with an estimate usually by late November and a final amount per share during announced dates in December. Look at those and youíll know if you need to send in a 4th quarter estimated tax payment in January.
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Old 08-13-2022, 02:25 PM   #5
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When I had the majority of my income in December due to high end of year capital gains, I was initially presented with a penalty for underpayment of estimated taxes in Turbotax. But when I filled out the schedule of my income during the year quarter by quarter, the penalty vanished.
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Old 08-13-2022, 06:03 PM   #6
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I would suggest your first year with having some W2 and some other income is to map out your best guess of income and tax due on that. My first year I had 8 months of W2 and rest was funded by after tax funds which had no impact on taxes. Therefore my taxable income was only 2/3 of what it would have been if I worked the whole year. Because of this, I had more withholding than was needed.
Next year (2019) i paid estimated taxes to get to 110% of 2018 tax due and started Roth conversions. After couple years doing that I have a spreadsheet to track income so I have some little hope Iíll get close. Last tip I learned here is in Dec when most is known, I took a small IRA distribution with 80% withheld for feds and 20% for state.

Hope this helps.
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Old 08-13-2022, 06:55 PM   #7
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My income was lumpy last year, and we were hit with a $200 penalty for not paying enough estimated taxes in the quarters some of the income was made. I had overpaid in order to get the $5,000 iBond, but they rejected that because of the penalty even though plenty had been paid in. I got all that money in my refund, but missed out on the extra iBond.
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