Pre Paying estimated tax payments

[MrLoco]

A little confused on this topic and trying to avoid having to pay any interest or a penalty.
When my CPA filed my Federal and State Taxes last year I owed a small amount in interest/penalty as I had not paid enough during each quarterly period.

This year I did a huge Roth Conversion in the second quarter and made a huge second quarter Federal and State Estimated Tax payment. ( I also made a smaller 1st. quarter estimated payment).

I believe the 2nd quarter payment is more than enough to cover not only the Roth conversion ( done in MAy of this year); but also to pay any taxes due in the 3rd and 4th quarter of this year ( from pensions; dividends; RMD's, etc).
So I have not made any 3rd or 4th quarter estimated tax payments.

Even though I understand the IRS sees taxes as a "pay as you go" system; if I prepaid all remaining taxes due for the entire year in the 2 nd qtr. of this year; this should satisfy my tax liabilty correct?

And I realize I am paying the IRS/ State earlier than I need to; but just asking if this is suffcient to avoid any penalties/ interest for this year.
Thanks.

[njhowie]

Quote:

Originally Posted by MrLoco Even though I understand the IRS sees taxes as a "pay as you go" system; if I prepaid all remaining taxes due for the entire year in the 2 nd qtr. of this year; this should satisfy my tax liabilty correct?

That is correct. They're more than happy to have your money in advance.

[PaunchyPirate]

When you have income that is irregularly spread out through the year, you may need to complete the more detailed portions of the IRS form 2210 in order to avoid interest/penalties. Those portions of the form articulate which quarter the income came in and which quarter your estimated tax payments were made in. This MAY be needed to prove no interest/penalty is due.

The form can get a little confusing and it requires you to first figure out which quarter each tidbit of income came in. But once you have that, it's not all that difficult to figure out. You'd probably have to provide the specific dates of your income to your CPA for them to enter it.

[OldShooter]

If your situation is such that you can pay from and IRA via a specified amount of withholding, you might benefit from this thread: https://www.early-retirement.org/for...ng-111924.html

[Animorph]

You'll be able to determine your taxes by quarter (what fun!) and match the quarterly liability with the tax payments to that point. You should be covered, but I tried to avoid that paperwork.

Paying with a 100% tax withheld IRA withdrawal would be nice if that is something you would normally need to do. Otherwise I don't think the penalties are bad enough to pay taxes on that withdrawal.

Mostly I send in my four equal estimated tax payments that gets me to the 100%/110% of last tax liability safe harbor or covers 90% of current taxes due. From Roth conversion planning I usually have a good idea of what my tax liability will be.

[CincyDave]

Quote:

Originally Posted by OldShooter If your situation is such that you can pay from and IRA via a specified amount of withholding, you might benefit from this thread: https://www.early-retirement.org/for...ng-111924.html

Just did this. So much easier than quarterly.

[Cobra9777]

Quote:

Originally Posted by OldShooter If your situation is such that you can pay from and IRA via a specified amount of withholding, you might benefit from this thread: https://www.early-retirement.org/for...ng-111924.html

Quote:

Originally Posted by Animorph ...Paying with a 100% tax withheld IRA withdrawal would be nice if that is something you would normally need to do. Otherwise I don't think the penalties are bad enough to pay taxes on that withdrawal...

Quote:

Originally Posted by CincyDave Just did this. So much easier than quarterly.

+1

I started doing this last year after I turned 59.5. Everything is much more straightforward... paying, filing, paperwork, planning. Plus better cashflow... I withdraw the lesser of two safe harbor amounts in late Dec, with 100% withholding, and settle up when I file in April. If you'd rather use taxable funds to pay tax, you can also repay (rollover) the IRA withdrawal amount within 60 days and avoid tax on the withdrawal. But obviously you still get the advantages of withholding, which the IRS deems to have been spread equally throughout the year.

[OldShooter]

Quote:

Originally Posted by Cobra9777 ... If you'd rather use taxable funds to pay tax, you can also repay (rollover) the IRA withdrawal amount within 60 days and avoid tax on the withdrawal. But obviously you still get the advantages of withholding, which the IRS deems to have been spread equally throughout the year.

Cute trick. I like it. You'd have to do the repayment in the same tax year, I think. Right?

[Cobra9777]

Quote:

Originally Posted by OldShooter Cute trick. I like it. You'd have to do the repayment in the same tax year, I think. Right?

No. Just has to be within 60 days of the withdrawal. Last year, I did the withdrawal in late December 2020, and the repayment in mid-January 2021.

One other caveat, you can only do one rollover per year. I get around this by alternating between using my IRA and my wife's IRA for the withdrawal. Even though we file MFJ, we are each individually entitled to one rollover per year.

[Montecfo]

Quote:

Originally Posted by MrLoco A little confused on this topic and trying to avoid having to pay any interest or a penalty. When my CPA filed my Federal and State Taxes last year I owed a small amount in interest/penalty as I had not paid enough during each quarterly period. This year I did a huge Roth Conversion in the second quarter and made a huge second quarter Federal and State Estimated Tax payment. ( I also made a smaller 1st. quarter estimated payment). I believe the 2nd quarter payment is more than enough to cover not only the Roth conversion ( done in MAy of this year); but also to pay any taxes due in the 3rd and 4th quarter of this year ( from pensions; dividends; RMD's, etc). So I have not made any 3rd or 4th quarter estimated tax payments. Even though I understand the IRS sees taxes as a "pay as you go" system; if I prepaid all remaining taxes due for the entire year in the 2 nd qtr. of this year; this should satisfy my tax liabilty correct? And I realize I am paying the IRS/ State earlier than I need to; but just asking if this is suffcient to avoid any penalties/ interest for this year. Thanks.

Correct.

[OldShooter]

Quote:

Originally Posted by Cobra9777 ... Last year, I did the withdrawal in late December 2020, and the repayment in mid-January 2021. ...

Sorry to be dense, but then the 1099 showed your tax payment draw as income. Did your tax return then indicate that the drawn amount was rolled over back into the same account, hence effectively deducting it from the 1099 figure?

[Montecfo]

Quote:

Originally Posted by OldShooter If your situation is such that you can pay from and IRA via a specified amount of withholding, you might benefit from this thread: https://www.early-retirement.org/for...ng-111924.html

True.

And OP mentioned a pension, you can usually adjust your withholding from a pension as needed to get paid in or meet a safe harbor. And you do not have to declare any additional income as you would with IRA withholding.

[Cobra9777]

Quote:

Originally Posted by OldShooter Sorry to be dense, but then the 1099 showed your tax payment draw as income. Did your tax return then indicate that the drawn amount was rolled over back into the same account, hence effectively deducting it from the 1099 figure?

I asked that exact question in a related thread last year. Kaneohe responded as follows:

Quote:

Originally Posted by kaneohe The 1099-R , in principle, shows both the gross and taxable distribution. In practice, the box called "taxable amount not determined" should almost always be checked since the IRA custodian does not know what you did w/ the funds, how much basis you have, etc. even if they have a number for taxable amount. The gross amount is entered on the 1040. The taxable amount is entered as 0 w/ explanatory "Rollover" nearby to explain the difference.

In a nutshell, the 1099-R just reports a distribution. How, or if, it is taxable is for the taxpayer to report. I reported it as a non-taxable rollover in TurboTax. And that was that.

[rayvt]

Quote:

Originally Posted by Montecfo True. And OP mentioned a pension, you can usually adjust your withholding from a pension as needed to get paid in or meet a safe harbor.

Yeah, I tried this the first few years after we retired. It never worked out. I could never get the withholding worked out right, was either grossly over-withheld or grossly under-withhed. Doing one big withholding from an IRA distribution in December was much easier. Plus I could adjust the pension withholding to a few dollars to make the net come out to a nice convenient number of exact dollars and no cents.

Quote:

Originally Posted by Cobra9777 No. Just has to be within 60 days of the withdrawal. Last year, I did the withdrawal in late December 2020, and the repayment in mid-January 2021.

Cute trick. I'll have to think about this, to see if it makes any sense. When you are retired, your entire income is pension(s), SS, and portfolio withdrawals. You don't have an income stream of paychecks that you can earmark for the repayment.

At first blush, though, this looks like it might be a simple way to pay the tax from yor regular non-IRA portfolio while having the benefit of late in the year withholding. Have to think more about it.