Equal Estimated Tax Payments

[I Yam What I Yam]

I'm hoping someone could clarify a point of confusion for me. Our tax preparer just finished our 2022 tax return and we owed a $590 penalty because we did not make equal tax payments.

In 2022, we made equal payments for our estimated taxes on our investment and W-2 income. However, in December we converted $200K and paid taxes from our available cash so the 4th estimated tax payment was larger than the equal payments we had made throughout the year. Overall, we paid more tax that was due and will be getting a small refund.

Is it correct that we should have a penalty since we made 4 estimated tax payments and paid more than 90% of the taxes we needed to pay as evidenced by a refund?

[RunningBum]

Was form 2210 filed? That matches up uneven estimated payments with uneven income such as the large conversion. Otherwise that $200K conversion is considered to be spread over the whole year.

Your tax preparer should know this, if they don't I'd wonder what else they don't know about.

[COcheesehead]

TurboTax will tell you exactly why. Your tax preparer should as well.

[audreyh1]

There is safe harbor based on 100% (or 110% if prior AGI $150K+) of your prior years taxes (2021). If you paid those in 4 equal installments for 2022 then your 2022 incoming timing does not matter.

If you paid 90% based on your 2022 income, you must need to file form 2210 to show that the bulk of the income occurred during the last estimated tax period. If you file that I would think it likely no penalty. That’s probably the key thing for your current situation.

You need to organize your cumulative 2022 taxable income by tax quarter (Jan-Mar, Jan-May, Jan-Aug, whole year) so your tax preparer can fill out form 2210. They may not have tried that if they didn’t have the timing of your 2022 income.

[I Yam What I Yam]

Thanks everyone for the advice so far. Here's a few answers:

I am able to locate the worksheet for Form 2210 in the completed return but not the actual Form 2210. The worksheet doesn't have any income information, only the equal payment tax requirement and the actual payments in each quarter. My gut feel is the preparer did not take into account the timing of the income. I've written her and asked to discuss this further.

After talking to our tax preparer in 2021, we decided not to pay 110% of the prior years taxes because we had completed a conversion in that year which would have made for a large loan to the government until we filed the 2022 tax return and had an excess.

We've used a tax preparer the last two years due to some more complicated issues we didn't want to deal with; however, I am beginning to think we need to go back to doing the taxes ourselves.

[audreyh1]

If the return doesn’t include the Schedule AI portion of Form 2210, then your preparer was not aware of the timing and must have assumed income was evenly distributed throughout the year. https://www.irs.gov/pub/irs-pdf/f2210.pdf

[ERD50]

Q: Does the safe harbor rule cover you if you had income evenly all year, but only pre-paid the 100/110% in Q4? Or would it still need to be roughly 4 quarterly payments that add up to 100/110%?

Another way to say that, is one Q4 pre-payment OK, or is it 100/110% of each quarter's estimate? Is the penalty determined on a quarterly basis, or an annual one?

-ERD50

[I Yam What I Yam]

Quote:

Originally Posted by audreyh1 If the return doesn’t include the Schedule AI portion of Form 2210, then your preparer was not aware of the timing and must have assumed income was evenly distributed throughout the year. https://www.irs.gov/pub/irs-pdf/f2210.pdf

Thanks! I searched and didn't see the Schedule AI in the documents I have. The disappointing part is before we did the conversion, I contacted her to have her tell us the 4th quarter tax payment so she was aware of the unequal income and the timing of the conversion.

We'll have a chat with her and go from there.

Thanks again.

[audreyh1]

Quote:

Originally Posted by ERD50 Q: Does the safe harbor rule cover you if you had income evenly all year, but only pre-paid the 100/110% in Q4? Or would it still need to be roughly 4 quarterly payments that add up to 100/110%? Another way to say that, is one Q4 pre-payment OK, or is it 100/110% of each quarter's estimate? Is the penalty determined on a quarterly basis, or an annual one? -ERD50

No, it has to be equally paid 1/4 each tax quarter. You can’t wait until Q4 without incurring a penalty.

However, if you’ve paid the first 3 quarters equally based on prior year’s taxes and find that you will overpay current year’s taxes owed with the 4th estimated tax payment you can adjust to paying 90% of current taxes owed for that 4th installment. That’s the other safe harbor but must also meet “equal (or more)” payments.

[Montecfo]

Just to be clear: there is no requirement to make equal estimated tax payments and no penalty for not doing so.

Instead, each quarter has its own calculation with individual safe harbors as mentioned.

I think even IRS statements on this are needlessly confusing.

As retirees with variable income sources and timing, we all should be aware of these calculations.

[I Yam What I Yam]

Quote:

Originally Posted by Montecfo Just to be clear: there is no requirement to make equal estimated tax payments and no penalty for not doing so. Instead, each quarter has its own calculation with individual safe harbors as mentioned. I think even IRS statements on this are needlessly confusing. As retirees with variable income sources and timing, we all should be aware of these calculations.

Thanks! My wife and I were rather shocked to see the penalty as that was our understanding too from all the reading we had done. We've been retired for a year or so and have a lot of learning to do.

[ERD50]

Quote:

Originally Posted by Montecfo Just to be clear: there is no requirement to make equal estimated tax payments and no penalty for not doing so. Instead, each quarter has its own calculation with individual safe harbors as mentioned. I think even IRS statements on this are needlessly confusing. As retirees with variable income sources and timing, we all should be aware of these calculations.

Sorry, that wasn't 100% clear to me.

"Just to be clear: there is no requirement to make equal estimated tax payments and no penalty for not doing so."

But, if your income was equal each quarter, you would need to be making equal Quarterly estimated payments to avoid an underpayment error in one or more of the quarters, right?

So your second statement I take as the more general case - the estimated payment for a specific Quarter must match the income for that specific Quarter, to avoid a penalty?

-ERD50

[audreyh1]

Quote:

Originally Posted by Montecfo Just to be clear: there is no requirement to make equal estimated tax payments and no penalty for not doing so. Instead, each quarter has its own calculation with individual safe harbors as mentioned. I think even IRS statements on this are needlessly confusing. As retirees with variable income sources and timing, we all should be aware of these calculations.

The 4 equal installments rule is just if you want to avoid filing Form 2210 Schedule AI section and the associated bookkeeping which is a lot more work. I was answering the question of whether someone could wait until Q4 to pay all then based on the 100%/110% safe harbor rule.

Yes, an alternative to avoiding penalty is to use the Annualized Income method for paying estimated taxes where you calculate how much you owe so far and pro-rate it, and filing the Form 2210 to show the income timing. It’s a lot more work but avoids underpayment penalties.

[Car-Guy]

Quote:

Originally Posted by audreyh1 No, it has to be equally paid 1/4 each tax quarter. You can’t wait until Q4 without incurring a penalty.

So for us retired folks that just have SS and tIRA/401k withdrawals/RDM's, can't we just make one big withdrawal in December and pay it all then w/o penalty?


I've been doing that and no penalty.

[braumeister]

Quote:

Originally Posted by Car-Guy So for us retired folks that just have SS and tIRA/401k RDM's, can't we just make one big RMD withdrawal in December and pay it all then w/o penalty?

Many people do exactly that.

[audreyh1]

Quote:

Originally Posted by Car-Guy So for us retired folks that just have SS and tIRA/401k withdrawals/RDM's, can't we just make one big withdrawal in December and pay it all then w/o penalty? I've been doing that and no penalty.

Quote:

Originally Posted by braumeister Many people do exactly that.

And us retired folks who don’t have pension, SS, RMD or anything to withhold from still have to pay exclusively by estimated tax payments.

[ERD50]

Quote:

Originally Posted by Car-Guy So for us retired folks that just have SS and tIRA/401k withdrawals/RDM's, can't we just make one big withdrawal in December and pay it all then w/o penalty? I've been doing that and no penalty.

Yes, withdrawals from things like paychecks, SS, IRA/401ks are considered to be over the course of the year, even if all done at the end of the year. This is what I do (with the small inherited IRA my DW has from her mother/father, that I just want to deplete over the next few years to simply our accounts) .

I finally set up my MIL with this, from her RMD (after verifying all this with her tax guy). Sure was easier than what she was doing, writing 8 checks a year (State and Fed), mailing, waiting to make sure they cleared (in case they got lost in the mail), etc. I got it done for her with a few clicks, done at the same time I was making her RMD for her, so almost zero extra work, and we had an immediate written/digital record of the transaction. Win-Win-Win. I like those.

-ERD50

[ERD50]

Quote:

Originally Posted by audreyh1 No, it has to be equally paid 1/4 each tax quarter. You can’t wait until Q4 without incurring a penalty. However, if you’ve paid the first 3 quarters equally based on prior year’s taxes and find that you will overpay current year’s taxes owed with the 4th estimated tax payment you can adjust to paying 90% of current taxes owed for that 4th installment. That’s the other safe harbor but must also meet “equal (or more)” payments.

Thanks! -ERD50

[audreyh1]

Quote:

Originally Posted by ERD50 Thanks! -ERD50

I think you noticed that using the Annualized Income method for estimating tax payments each tax quarter and filing Form 2210 Schedule AI also avoids penalty?

[Montecfo]

Quote:

Originally Posted by ERD50 Sorry, that wasn't 100% clear to me. "Just to be clear: there is no requirement to make equal estimated tax payments and no penalty for not doing so." But, if your income was equal each quarter, you would need to be making equal Quarterly estimated payments to avoid an underpayment error in one or more of the quarters, right? So your second statement I take as the more general case - the estimated payment for a specific Quarter must match the income for that specific Quarter, to avoid a penalty? -ERD50

If your income is equal then yes the minimum estimated tax payment for each quarter would be the same.

But for most folks income would likely not be the same each quarter.

Point was the penalty is computed with respect to each quarter and they can vary without triggering a penalty.