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]

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]

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]

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]

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]

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]

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]

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]

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.

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]

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]

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]

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]

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.

 

[jebmke]

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.

Most years, I do a variation on this. I set up 4 safe harbor payments in EFTPS and then in December (or even early January) when I know with near certainty what the tax return looks like, I adjust the 4th quarter such that I owe.

This system works most of the time; however it failed in 2022 because in Q4 we decided to donate a large slug of appreciated stock to our DAF and it drove our tax liability way down. But now, the safe harbor for 2023 is very low so not likely to repeat this even if we repeat the late year donation.

 

[Montecfo]

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.

It may not be a lot of work but it could be. Then again I am accountant.

Let's say you had a large capital gain in December. It would be rather easy to reflect all income evenly except that single item, then just add that one item to Q4 using annualized income.

Same with a Roth conversion or RMD.

 

[Jerry1]

I think this is as simple as - your tax preparer screwed up. They should file an amended return for you without any cost to you.

I did the same thing as you - mine was a large withdrawal at year end. My only estimated tax payment was for the forth quarter. I filled out 2210 using Turbo Tax and there was no penalty. Not sure why people say it’s hard to fill out. I thought it was pretty straightforward - at least it was with using Turbo Tax.

 

[audreyh1]

Most years, I do a variation on this. I set up 4 safe harbor payments in EFTPS and then in December (or even early January) when I know with near certainty what the tax return looks like, I adjust the 4th quarter such that I owe.

This system works most of the time; however it failed in 2022 because in Q4 we decided to donate a large slug of appreciated stock to our DAF and it drove our tax liability way down. But now, the safe harbor for 2023 is very low so not likely to repeat this even if we repeat the late year donation.

That’s exactly what I do. But I don’t consider your scenario a failure. It’s a trade-off against using the Annualized Income method which is a lot more time consuming.

In 2022 I ended up overpaying with just the 3 payments because my investment income dropped much more than expected. So I cancelled the 4th payment.

I should point out that my income all from investments is very unpredictable. I really don’t know until Dec where I stand. Then I’m furiously estimating income and taxes for the year, checking MAGI against projected IRMAA thresholds two years out, and deciding if I want to take any additional steps that will impact current year income versus future income.

 

[audreyh1]

I think this is as simple as - your tax preparer screwed up. They should file an amended return for you without any cost to you.

I did the same thing as you - mine was a large withdrawal at year end. My only estimated tax payment was for the forth quarter. I filled out 2210 using Turbo Tax and there was no penalty. Not sure why people say it’s hard to fill out. I thought it was pretty straightforward - at least it was with using Turbo Tax.

It depends on your sources of income. I have taxable income every quarter from various investments and accounts although most of it occurs in December. I have to run various Quicken reports as well as my Annualized Income spreadsheets each quarter and save all that info for Form 2210. It takes some time. Whereas if I use the simpler method I’m only doing that in December. I like not having to revisit taxes every quarter.

I’ve been doing this since 1999 so I’m aware of which trade-offs work for me and have settled on the easiest for me, although I evaluate the choice every year.