Poll: Estimated Taxes

[audreyh1]

Uh oh. I paid my April and June quarterly estimated payments at the same time (in fact, in the exact same payment). I paid $600x2 = $1200. I didn't see anywhere to designate which quarter I'm making estimated payments for. Hopefully the IRS won't mind getting the 2nd quarter payment a little early

- no penalties for pre-pay of course! Only for late payments.

How is it designated? The form you mail in with each payment indicates the quarter. With EFTPS you only assign the tax year for any estimated tax payment. But in all cases, when you file your taxes you report to TurboTax, for example, the dates you made each payment and that is used to determine whether things were "on time".

If you lumped everything into one payment for two quarters, it could cause a bit of confusion (Q1 was $1200, Q2 was $0), but tax program should be able to reconcile it all and show the amount you paid was ahead of schedule.

I noticed my Dad paying his quarterly estimated taxes early, and I think he was worried about missing the dates. So this year my Dad's tax preparer had him pay for the whole year with his first quarterly payment - this is for the estimated amount above what is already withheld from his pension. She says she does this for several of her elderly clients, including her own Dad. My Dad was quite pleased with this solution.

 

[FUEGO]

I noticed my Dad paying his quarterly estimated taxes early, and I think he was worried about missing the dates. So this year my Dad's tax preparer had him pay for the whole year with his first quarterly payment - this is for the estimated amount above what is already withheld from his pension. She says she does this for several of her elderly clients, including her own Dad. My Dad was quite pleased with this solution.

That was kind of my thinking, too. We leave June 12 for Europe, arrive June 13 and I've found that technology doesn't always work (internet broken in the airbnb; IRS payment processor won't accept incoming Portuguese IP addresses etc) for these time critical things. So I paid ahead. One more thing crossed off the list.

 

[Fedup]

I hope IRS takes American Express.

 

[meierlde]

- no penalties for pre-pay of course! Only for late payments.

How is it designated? The form you mail in with each payment indicates the quarter. With EFTPS you only assign the tax year for any estimated tax payment. But in all cases, when you file your taxes you report to TurboTax, for example, the dates you made each payment and that is used to determine whether things were "on time".

If you lumped everything into one payment for two quarters, it could cause a bit of confusion (Q1 was $1200, Q2 was $0), but tax program should be able to reconcile it all and show the amount you paid was ahead of schedule.

I noticed my Dad paying his quarterly estimated taxes early, and I think he was worried about missing the dates. So this year my Dad's tax preparer had him pay for the whole year with his first quarterly payment - this is for the estimated amount above what is already withheld from his pension. She says she does this for several of her elderly clients, including her own Dad. My Dad was quite pleased with this solution.

At the end of the day if you look at form 2210 you find that if you are owed a refund it does not matter when you pay your estimated taxes. On form 2210 it figures the required amount typically 90% of taxes due, then sums withholding and estimated taxes and if they exceed the above amount no penalty is due. BTW the rate this year on underpayments is still 2.65%. See the form for more details I have ommitted the last years exception, since it typically is a problem only in the year after retiring.

 

[audreyh1]

I hope IRS takes American Express.

Well yes, but you'll pay fees for the privilege - 1.87% to 2%
https://www.irs.gov/uac/pay-taxes-by-credit-or-debit-card

Some folks use this as a way to rack up points on their credit cards or related qualifying benefits (like 10,000 miles each year if you spend $25,000 on a United Mileage credit card).

 

[audreyh1]

At the end of the day if you look at form 2210 you find that if you are owed a refund it does not matter when you pay your estimated taxes. On form 2210 it figures the required amount typically 90% of taxes due, then sums withholding and estimated taxes and if they exceed the above amount no penalty is due. BTW the rate this year on underpayments is still 2.65%. See the form for more details I have ommitted the last years exception, since it typically is a problem only in the year after retiring.

So someone can wait until Jan 15, pay all their estimated taxes, and as long as they overpaid a little, owe no penalty? I don't think I believe this because then everyone would do precisely that. I do believe things are checked quarterly.

If taxes weren't paid in four equal installments by the quarterly due dates, say $0, $0, $0, and $full amount, I believe you will be assessed a late penalty for the three quarters you did not pay, unless you fill out Form 2210 to say that you had no income for the first three quarters.

You may be safe if you've paid 90% of the taxes owed by Jan 15, but you still have to pay them in 4 equal installments by the quarter deadlines, otherwise you have fill out the actual income and taxes owed each quarter on form 2210 to avoid penalty.

 

[skyline]

I always ignore estimated taxes, and end up paying somewhere around 1.5%-3% penalty at tax time. It's such a small penalty that I wonder why everyone puts up with the headache and effort of figuring out the estimated taxes and submitting payments on a quarterly basis.

It doesn't always work out, but most years, you'll actually do better just keeping your money in investments and then paying the penalty rather than paying estimated taxes during the year.

Perhaps your tax situation would result in a higher penalty %? Easy enough to check if you use tax software, just bring up one of your old tax returns and remove the estimated tax payments to see what your penalty would have been. My guess is that anything under 4-5%, and you're better off just ignoring it and letting turbotax automatically figure out your penalty at tax time...

 

[old woman]

I carried forward part of an overpayment from 2015 to 2016 for my exact 2015 tax. This year I will withdraw some from tIRA and withhold some taxes in December. I itemize and had so many medical bills last year my total tax for 2016 was $114. Medical will be high again this year so another low tax year.

 

[kaneohe]

At the end of the day if you look at form 2210 you find that if you are owed a refund it does not matter when you pay your estimated taxes. On form 2210 it figures the required amount typically 90% of taxes due, then sums withholding and estimated taxes and if they exceed the above amount no penalty is due. BTW the rate this year on underpayments is still 2.65%. See the form for more details I have ommitted the last years exception, since it typically is a problem only in the year after retiring.

Are you talking about the short method in Pt. III? You might have missed the instructions on top:

"Can You Use the
Short Method?
You can use the short method if:
• You made no estimated tax payments (or your only payments were withheld
federal income tax), or
• You paid the same amount of estimated tax on each of the four payment
due dates."

so audrey is correct.

also the interest rate looks to me to be 4%, not the 2.65% quoted above. The 2.65% is from the short method to be used if all payments were equal. If they were, the average time period to the mid April filing date is 8 mos. Annualizing that yields a factor of 1.5 that applied the 2.65% rate yields 3.98, close to 4%. You can see the 4% rate
in the wksht on p. 6 here https://www.irs.gov/pub/irs-pdf/i2210.pdf

 

[youbet]

We did estimated tax payments for many years. Now that we're beginning RMD's, I'll just do a tax estimate late in the year and have an appropriate withholding amount taken from the IRA withdrawal. Seems easier than doing the estimate early in the year in order to decide on an amount for four estimated payments.

I still need to check with Schwab and find out how much notice they need to do the RMD by EOY. I'm hoping no sooner than Dec 1st.

 

[meierlde]

How the IRS determines the quarterly income is not clear in that in the case of interest and dividends they get only an annual total. It must be the one off payments that make a difference, although again how they determine when they occur in many cases is not clear. (unless for annual reporting items they divide by the number of months for each period) Again as skyline says the penalty is so small, and in general you just get a bill.

 

[kaneohe]

How the IRS determines the quarterly income is not clear in that in the case of interest and dividends they get only an annual total. It must be the one off payments that make a difference, although again how they determine when they occur in many cases is not clear. (unless for annual reporting items they divide by the number of months for each period) Again as skyline says the penalty is so small, and in general you just get a bill.

IRS does not determine the timing of the quarterly income. You do if you wish to use Sch AI of the 2210. IRS however can easily determine the timing of your quarterly tax payments and assuming income is even through the year can determine whether you have underpaid any quarterly payment.

 

[audreyh1]

We did estimated tax payments for many years. Now that we're beginning RMD's, I'll just do a tax estimate late in the year and have an appropriate withholding amount taken from the IRA withdrawal. Seems easier than doing the estimate early in the year in order to decide on an amount for four estimated payments.

I still need to check with Schwab and find out how much notice they need to do the RMD by EOY. I'm hoping no sooner than Dec 1st.

Yeah, that's a really nice loophole to be able to withhold late in the year instead of paying estimated taxes.

 

[audreyh1]

How the IRS determines the quarterly income is not clear in that in the case of interest and dividends they get only an annual total. It must be the one off payments that make a difference, although again how they determine when they occur in many cases is not clear. (unless for annual reporting items they divide by the number of months for each period) Again as skyline says the penalty is so small, and in general you just get a bill.

You report the quarterly timing of the income to the IRS on Form 2210, otherwise the IRS assumes your income is evenly spread out over the year. You can put whatever you want on the 2210, but if you're audited, you had better have documentation to back up what you reported.

 

[kaneohe]

I always ignore estimated taxes, and end up paying somewhere around 1.5%-3% penalty at tax time. It's such a small penalty that I wonder why everyone puts up with the headache and effort of figuring out the estimated taxes and submitting payments on a quarterly basis.
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sounds about right if you are basing it on the penalty/tax due. If the actual rate is R, you would be paying about 2/3 R calculated your way so if R=3% as it has been for the past few yrs, you'd be paying 2% by your calculation.
Funny thing about numbers.....for me anyway........if I owe 1K and and pay 2% penalty and owe $20,it feels like 2%. If I owe 10K and pay $200 in penalties,it feels more like $200.......like real money.

 

[Fedup]

I've been owing tax every year in the last 4 years I was working. I might have paid $70 max on $2-3k tax. No biggie. No need to get all stressed out.