Question re: Roth Conversion and Estimated Taxes

[Trooper]

We are retired and have been making quarterly estimated tax payments since we retired in 2016.

For each year, I calculate the quarterly estimated amount simply by dividing the prior year's tax liability by four, thus utilizing the safe harbor provision. This seems a whole lot easier than estimating income and tax liability at the start of each year. Our income has included a Roth conversion to get us to the top of the 12%/15% bracket.

For 2019 we have decided to make a significantly larger Roth conversion - one which would take us to the top of the 22% bracket. The conversion has not been transacted yet. My question is how to handle the extra taxes due on the conversion. I don't want to withhold them from the conversion, but want instead to pay the taxes out of our taxable holdings. Am I OK paying the delta when I file in April, or must I pay them with my Q4 estimated payment in January?

 

[kaneohe]

If you meet safe harbor, you can pay the balance in April. Of course, next yr will be more interesting.

 

[SecondCor521]

Agree with kaneohe about this year.

Next year you can still follow your usual safe harbor method. Do note that above a certain AGI, the safe harbor is 110%, not 100% of the previous year's taxes due.

There are multiple safe harbors. You may find that one of the other safe harbor methods result in lower estimated taxes. But those lower estimated taxes probably come with some additional complexity.

 

[Trooper]

Do note that above a certain AGI, the safe harbor is 110%, not 100% of the previous year's taxes due.

Thanks. Does the AGI test refer to this year's (2019) AGI or last year's (2018)? Last year our AGI was less than the $150K, but this year it will be more, due to the larger Roth conversion.

 

[SecondCor521]

Thanks. Does the AGI test refer to this year's (2019) AGI or last year's (2018)? Last year our AGI was less than the $150K, but this year it will be more, due to the larger Roth conversion.

Well, it refers to the previous tax year in the case of that safe harbor rule.

So if your AGI is above the limit in 2018, then your safe harbor for 2019 estimated taxes is 110% of 2018 taxes due. If your AGI is above the limit in 2019, then your safe harbor for 2020 estimated taxes is 110% of 2019 taxes due. And so forth.

The safe harbor rules vary in terms of which year is referenced, so read them carefully. Some reference prior year, some reference current year.