How do you estimate taxes?

[DeborahB]

That is just fine for what is due tomorrow. And you are covered so far. [I hope you took into account what had been already withheld so far out of your paycheck]

But you can still go back and figure more precisely in future quarters and lower you payment if it looks like you are paying too much. There is no rule that says you can't change your method in later quarters based on income so far.

Audrey

Since I was maxing out a 401K in 6 months AND putting $ into a pre-tax medical fund AND my health insurance is pre-tax... I discovered I have only paid about $500 total in federal tax to date. Eeeek. I didn't even bother to deduct 1/4 of that. I just paid 25% of what I owed for 2009, wrote the checks, and cursed. The checks are in the mail.

I really appreciate all the help. I had just assumed that since I hadn't officially "planned" (announced) retirement, I could get around dealing with this until the Sept. payment was due. I decided it was more prudent (if financially painful) to pay quarterly for now. I'll have a good idea in January what happened - maybe even in September.

Thanks for mentioning I can amend it later if I'm paying too much. I am so not in favor of free loans to the IRS!

Thanks again for all the links, help, etc. In a year I can be the expert and help someone new, I hope!

Additional input is still welcome - this has been really helpful, probably not just to me.

 

[donheff]

I have spent some time running Turbo Tax scenarios for next year since our income will drop precipitously since DW ERed. I think I have it forecast pretty well but we will see. After next year the changes should be gradual with the likelihood being that taxes will gradually increase as we begin to tap 401Ks/IRAs. As I understand it, we will be fine as long as we withhold at least 100% of the previous year's taxes, correct?

 

[audreyh1]

Since I was maxing out a 401K in 6 months AND putting $ into a pre-tax medical fund AND my health insurance is pre-tax... I discovered I have only paid about $500 total in federal tax to date. Eeeek. I didn't even bother to deduct 1/4 of that. I just paid 25% of what I owed for 2009, wrote the checks, and cursed. The checks are in the mail.

Actually, you could have deducted ALL of what you had withheld so far. But it's only $500 so probably doesn't matter. For your next estimated payment installment you can deduct all tax withheld year-to-date.

You're welcome for all the help. I've been paying estimated taxes for 12 years now and been through a lot of different scenarios.

Audrey

 

[audreyh1]

I have spent some time running Turbo Tax scenarios for next year since our income will drop precipitously since DW ERed. I think I have it forecast pretty well but we will see. After next year the changes should be gradual with the likelihood being that taxes will gradually increase as we begin to tap 401Ks/IRAs. As I understand it, we will be fine as long as we withhold at least 100% of the previous year's taxes, correct?

Yes, if your household income was <$150K (married joint filers). Otherwise you need to pay 110% of prior year's taxes to be safe.

If, as you go through the year, you think you might be way overpaying because your income is much less than prior year, you can change to the annualized income method.

Audrey

 

[DeborahB]

Actually, you could have deducted ALL of what you had withheld so far. But it's only $500 so probably doesn't matter. For your next estimated payment installment you can deduct all tax withheld year-to-date.

You're welcome for all the help. I've been paying estimated taxes for 12 years now and been through a lot of different scenarios.

Audrey

Thanks - I'll take the $500 (or whatever it is) off the next payment. It wasn't enough to bother about (divided into 4, I mean).

Had I thought of this earlier...!!!

 

[metabasalt]

Well - pensions are pretty easy because the income is predictable and paid out evenly. And I suspect the pension company will do the withholding for you, so it might not be much different than a salary tax-wise (except no FICA).

Issues arise when you have enough investment income or capital gains in addition to your pension to increase your tax liability such that you underpay via withholding.

Audrey

P.S. Geologist?

Thanks Audrey. My introduction to this was actually filling out the forms for the pension withdrawal for taxes. I THINK I did it correctly but is was all a great surprise to me and had to be done in a great hurry. Eventually I'll have to consider investment income. No, not a geologist. It's just a subject I've gotten interested in over the last 5-10 years. I'm also a birder. So now it's really unsafe to drive with me. If I'm not looking away from the road at birds I'm looking away from the road at formations!

 

[DeborahB]

I think I'm going to talk to a CPA about how to proceed - not today - in a few weeks - let him recover from the April 15 madness . Not for someone to do my taxes (I think) but to help with strategy and penalties and so on.

I got a referral to someone. This year is going to be the year for decisions and strategies - after that it will be less complex. He should be able to advise on the best way to take money out to live on - which bucket to tap first etc. I've got taxable income, tax-deferred income (IRA) and Roth IRAs and 2010 converted Roth IRA money (when to pay the tax...). And I do my own investing (with a broker).

Thanks again, wheeeeeeeeeee!

 

[Moemg]

This year I did it the easy way. I took the 2009 taxes owed, divided them by four and am paying that each quarter.

This is the easiest way. But if you think your taxes due in 2010 will be significantly lower than last years taxes due, this will cause you to overpay. Still, no worries about penalties.

http://www.early-ment.org/forums/f28/calculating-estimated-taxes-2008-2009-a-43407.html

Audrey

I do a version of this . I just divide my taxes owed my 12 and have monthly amounts taken from my pension . I've been doing it for three years and it's pretty painless .

 

[audreyh1]

I do a version of this . I just divide my taxes owed my 12 and have monthly amounts taken from my pension . I've been doing it for three years and it's pretty painless .

Yep - it's pretty easy when all your annual income is from a pension. That means it is a known quantity, and it can be treated just like it was at work with tax withholding.

It's when you have other sources of income (IRA withdrawals, investment income, realized capital gains, etc.) that it becomes tricky as these often aren't predictable.

Well, the IRA withdrawals probably are predictable since they are under your control and if taken in the first quarter you already know what you will owe for the year by April 15.

It's the others that can be really unpredictable. You never know what kind of distributions you are going to get from your mutual funds and most of them occur near the end of the ear. If you have lots of mutual funds in taxable accounts, this can be a large chunk of your impossible-to-predict annual income.

Audrey

 

[audreyh1]

I do a version of this . I just divide my taxes owed my 12 and have monthly amounts taken from my pension . I've been doing it for three years and it's pretty painless .

Yep - it's pretty easy when all your annual income is from a pension. That means it is a known quantity, and it can be treated just like it was at work with tax withholding.

It's when you have other sources of income (IRA withdrawals, investment income, realized capital gains, etc.) that it becomes tricky as these often aren't predictable.

Well, the IRA withdrawals probably are predictable since they are under your control and if taken in the first quarter you already know what you will owe for the year by April 15.

It's the others that can be really unpredictable. You never know what kind of distributions you are going to get from your mutual funds and most of them occur near the end of the ear. If you have lots of mutual funds in taxable accounts, this can be a large chunk of your impossible-to-predict annual income.

Audrey

 

[donheff]

I do a version of this . I just divide my taxes owed my 12 and have monthly amounts taken from my pension . I've been doing it for three years and it's pretty painless .

Yep - it's pretty easy when all your annual income is from a pension. That means it is a known quantity, and it can be treated just like it was at work with tax withholding.

It's when you have other sources of income (IRA withdrawals, investment income, realized capital gains, etc.) that it becomes tricky as these often aren't predictable.

You can still do it in more complicated situations. DW ER'd this year but will continue to have a small income from her firm (K1). We also pull from our portfolio. The sum of those two sources is about equal to my pension. I ran Turbo Tax scenarios to get a decent fix on total Fed and state taxes and am having the whole amount withheld from my pension. I don't want to bother with quarterlies. If I decide mid-year that I am high or low I can adjust my withholding online. This year is the most fuzzy. After that I can just take the 100% of previous year's tax approach -- should be very simple.

 

[audreyh1]

Yep, it's simple if your year-to-year income does not vary widely or is a known quantity, and if the income is taken either all in the first quarter, or taken out evenly throughout the year.

Unfortunately, for some of us living off taxable investments, none of the above is true.

Audrey

 

[donheff]

Yep, it's simple if your year-to-year income does not vary widely or is a known quantity, and if the income is taken either all in the first quarter, or taken out evenly throughout the year.

Unfortunately, for some of us living off taxable investments, none of the above is true.

Audrey

All I am saying is that if either you or your spouse have a sizable pension, and the ability to easily change withholding, having the provider do the withholding from the pension payments is as easy or easier than filing quarterlies. If your income varies significantly that will impact your quarterlies just like it will impact your withholding rates.

 

[Martha]

All I am saying is that if either you or your spouse have a sizable pension, and the ability to easily change withholding, having the provider do the withholding from the pension payments is as easy or easier than filing quarterlies. If your income varies significantly that will impact your quarterlies just like it will impact your withholding rates.

The last couple of years of work I worked very part time. I simply withheld nearly all my income in taxes and did not pay any estimates. I took a small draw (all withheld for taxes) with most of my income from the firm paid in June and December, so it was relatively easy to figure out by December if enough had been withheld and adjust accordingly.

 

[meierlde]

BTW the interest rate on underpayments is only 4% per annum see form 2210 line 30 where the penalty is percent of the year you underpaid each installment times .04. So if you are a little low 10 to 20 percent its not a real big deal.

 

[rescueme]

I have a very simple retirement income situation. Currently, my income comes from only tax-deferred vehicles (TIRA, Rollover IRA, and SPIA).

I simply have FIDO take out 15% FIT of my monthly withdrawal from my cash bucket and send it in. 15% is a bit high, but that's due to not having taxes taken out of my monthly SPIA income. I could have them also take out state income tax, but luckly I live in a state where retirement income is not taxed on a state or local level.

In early December (when I get the early version of TT) I simply plug in my YTD income, December's forecast withdrawal, and YTD FIT already paid.

Depending on the result, I adjust my December FIT tax payment to target my annual taxes within a $50+/- variance.

Nothing fancy at all, and it eliminates quarterly tax submissions....

 

[audreyh1]

Rescueme - that's a pretty novel approach from what I have seen and very clever! Congrats!

You came up with the 15% number based on prior year tax patterns I assume?

(wouldn't work for me as 95% of my investments are non-taxed deferred and we are not drawing from IRAs at present and have no annuities (SPIA))

Audrey

 

[Moemg]

Yep - it's pretty easy when all your annual income is from a pension. That means it is a known quantity, and it can be treated just like it was at work with tax withholding.

It's when you have other sources of income (IRA withdrawals, investment income, realized capital gains, etc.) that it becomes tricky as these often aren't predictable.


Audrey

Only one third of my income is from my Pension . The rest is made up of SS Survivor Benefit & withdrawals from my taxable accounts . Since my SS is very close to my pension amount I just doubled my withholding from my pension and so far so good ! I like the fact that I 'm not writing a big check four times a year and if I end up owing anything it is minimal.

 

[deserat]

I was in a similar situation to Audrey - I have self-employed income and it varies according to my business schedule. In 2008, all of my income was employee income and a *lot* more than what I made self-employed. I ended up paying taxes to the IRA, but the overall tax burden was less than half that of the previous year, so based on my reading of the rules, I'm OK.

I use the AI method for my tax calculations - mine is a bit easier as I have Foregin earned income, so only worry about the SSN and Medicare until a certain threshold of earning is reach and to be honest, I'm endeavoring to stay under that.

The only other variable is the increase in investment income needing to be accounted for in the estimated taxes - as that grows, then I will need a better estimating method .....