Question regarding tax withholding

[Purron]

My husband and I had lots of changes to our finances last year including me claiming social security. As a result of these changes, we didn’t have enough withheld and had modest underpayment penalties from the Feds and Commonwealth of Virginia. We’d like to avoid penalties next year. Our income is primarily from pensions, social security, and investments. What’s the best way to prepay taxes to the Feds and Virginia to avoid future penalties? Looked at the options from the IRS and Virginia and are not sure of the best way to proceed. We could increase withholdings from one of our income streams, set up a payment automatically from our checking, or just send in advance payments. Perhaps we’re missing another option. What say the experts around here?

[audreyh1]

There is something called safe harbor to avoid penalties for Federal taxes. As long as your withholding and estimated taxes match the taxes owed for the prior year (or prior year times 1.1 if income exceeded $150K) you won’t owe a penalty for underpayment even if taxes owed way exceed the prior years taxes. This needs to be paid in 4 equal installments of estimated taxes on the IRS quarterly estimated tax due dates, or if you can pay via withholding you have more flexibility and just need to have the amount withheld for taxes by the end of the year.

I don’t have tax withholding available so we pay estimated taxes via eftps.gov which lets us schedule tax payments as ACH withdrawals.

[Souschef]

For the Feds I use EFTPS and have quarterly estimated tax payments taken out of my checking account. You set up the dates and the amounts.

In CA they have a similar scheme. I do not know, but expect your state might have a similar program.

[SecondCor521]

Quote:

Originally Posted by audreyh1 There is something called safe harbor to avoid penalties for Federal taxes. As long as your withholding and estimated taxes match the taxes owed for the prior year (or prior year times 1.1 if income exceeded $150K) you won’t owe a penalty for underpayment even if taxes owed way exceed the prior years taxes. This needs to be paid in 4 equal installments of estimated taxes on the IRS quarterly estimated tax due dates, or if you can pay via withholding you have more flexibility and just need to have the amount withheld for taxes by the end of the year. I don’t have tax withholding available so we pay estimated taxes via eftps.gov which lets us schedule tax payments as ACH withdrawals.

@audreyh1, I assume that if one pays an amount equal to prior year's taxes owed by the first quarterly estimated date then one is also fine?

For example, I help with a trust that owed say $1500 in taxes for 2018. If the trust pays in $1600 by 4/15/19 for 2019 estimated, it should not be subject to underpayment penalties, right?

Obviously wouldn't do that if cash flow were a problem, but in this case it isn't.

(Seems easier to do in one fell swoop rather than sending in four checks on four different dates this year.)

...

@OP, some people do a withdrawal from their IRA near the end of the year and elect 99% withholding. This works well if the withdrawal is qualified and the additional income (if withdrawing from a traditional IRA) doesn't change the tax picture too much.

[audreyh1]

Sure, you can pay ahead.

[VanWinkle]

Quote:

Originally Posted by Purron My husband and I had lots of changes to our finances last year including me claiming social security. As a result of these changes, we didn’t have enough withheld and had modest underpayment penalties from the Feds and Commonwealth of Virginia. We’d like to avoid penalties next year. Our income is primarily from pensions, social security, and investments. What’s the best way to prepay taxes to the Feds and Virginia to avoid future penalties? Looked at the options from the IRS and Virginia and are not sure of the best way to proceed. We could increase withholdings from one of our income streams, set up a payment automatically from our checking, or just send in advance payments. Perhaps we’re missing another option. What say the experts around here?

You can set up withholding on your pension or SS checks to match your withholding liability. Your tax preparer should be able to assist you on how much you need to have withheld.

[Lakedog]

I do all withholding from fed pension as that is very simple and requires no extra effort to setup. Seems that withholding from pension or SS would be the easy way.

[RunningBum]

VA has an online payment system and other options that can be found here:
https://tax.virginia.gov/individual-...ayment-options

[donheff]

Quote:

Originally Posted by Lakedog I do all withholding from fed pension as that is very simple and requires no extra effort to setup. Seems that withholding from pension or SS would be the easy way.

Ditto. I adjust the amount in April to be sure I am within the safe harbor for the current year.

[mrfeh]

Quote:

Originally Posted by Souschef For the Feds I use EFTPS and have quarterly estimated tax payments taken out of my checking account. You set up the dates and the amounts. In CA they have a similar scheme. I do not know, but expect your state might have a similar program.

+1

Pay quarterly estimated taxes.

[RetireBy90]

We are in the middle of a similar situation, retired last year so had W2. Company paid for unused vacation and also sent a check for 2/3 of my 2018 bonus that would have been paid in 2019 but they sent it in 2018. So I had a couple extra checks from company. We also have 3 small pension checks so 4 incomes that makes tax rate higher than any of the individual sources of income.



So this year I have a plan to draw my spending above the pension checks from my TIRA and have 22% withheld. Then there are the tax changes for 2018 tax year, and we will file with standard deduction that is less than our itemized deduction from 2017 and before. However, we also will start one SS check in June so finances won't be settled down till 2020 taxes in 2021. Not that we can't deal with it but seems that there is a lot of work to let VA and Feds take a cut. I'm planning on a final end of year draw from IRA with 99% withholding to add any needed tax payments. Read about that on this site earlier. Hope that works out better than 2018 taxes.

[SumDay]

There was an article in the WSJ in June that said "...the IRS often waives estimated tax penalties incurred in the year someone retires or becomes disabled, or sometimes the year after that. To qualify, the taxpayer submits Form 2210 with proof and an explanation that the error wasn't willful. But, this relief often comes after a scary letter from the IRS and filling out yet another form - so avoid it is you can."

I printed this off last summer as I was going to retire in two months and thought we might be in this position. Hope this helps.

[ChrisC]

Quote:

Originally Posted by Lakedog I do all withholding from fed pension as that is very simple and requires no extra effort to setup. Seems that withholding from pension or SS would be the easy way.

Double ditto, but if you're doing large scale Roth Conversions, this might not even be enough. Safe harbor does have its limits even when withholding from your Federal pension.

[Purron]

Thanks for the suggestions everyone!

[audreyh1]

Quote:

Originally Posted by ChrisC Double ditto, but if you're doing large scale Roth Conversions, this might not even be enough. Safe harbor does have its limits even when withholding from your Federal pension.

What do you mean safe harbor has its limits?

As long as you pay the prior year’s taxes (or prior year’s taxes times 1.1 if your prior year income exceeded $150K), and you pay within the correct timeframes for estimated tax payments, or you have the amount withheld by the end of the tax year, you will not owe a Federal tax penalty even if your income and taxes jump an enormous amount.

So it makes absolutely no difference if you suddenly make a large scale Roth conversion.

[SecondCor521]

Just guessing what @ChrisC meant (because I lack boundaries and think I understand others better than most ):

There are (as I'm pretty sure @audreyh1 knows) at least three different safe harbors. Meet any one of them and you won't pay underpayment penalties.

The one audreyh1 mentions is how much one pays compared to the amount of prior year taxes. As she correctly points out, this is a good one because even if your income jumps, you still won't pay an underpayment penalty.

Another one, which may be the one ChrisC is thinking of, is that if you pay at least 90% of the current year's taxes then you're also OK. Obviously, if your current year tax liability jumps due to a large Roth conversion, then it may be harder to meet this safe harbor. This one does help, though, if one's income drops year over year.

A third one, I think, is if you owe less than $1,000. I don't think this one gets much use, but it does (or at least used to) exist.

(A fourth one - and I'm not sure if this is technically a safe harbor or not - is if you didn't owe taxes in the prior year. Then you can underpay the current year by any amount and be OK, at least that is my understanding.)

[ChrisC]

Quote:

Originally Posted by audreyh1 What do you mean safe harbor has its limits? As long as you pay the prior year’s taxes (or prior year’s taxes times 1.1 if your prior year income exceeded $150K), and you pay within the correct timeframes for estimated tax payments, or you have the amount withheld by the end of the tax year, you will not owe a Federal tax penalty even if your income and taxes jump an enormous amount. So it makes absolutely no difference if you suddenly make a large scale Roth conversion.

Well, yes, you could be good for the year in which you meet the safe harbor limits of 110% of tax liability for the prior year, but my point is with large conversions during that year this would make the safe harbor level for the succeeding tax year very difficult to meet by mere taxwithholding. Say you calculate your safe harbor level to be $40K in 2018 (but you did $200K in Roth conversions in 2018 so that your safe harbor level is now $85K for 2019). If you're on a Federal pension and the most you can reasonably withhold for 2019 is $60K, then you have to make estimated payments for the difference or withhold from the conversions.

[ivinsfan]

Quote:

Originally Posted by SumDay There was an article in the WSJ in June that said "...the IRS often waives estimated tax penalties incurred in the year someone retires or becomes disabled, or sometimes the year after that. To qualify, the taxpayer submits Form 2210 with proof and an explanation that the error wasn't willful. But, this relief often comes after a scary letter from the IRS and filling out yet another form - so avoid it is you can." I printed this off last summer as I was going to retire in two months and thought we might be in this position. Hope this helps.

What scary letter, if you owe underpayment penalties or interest don't they show up and get included when you filed your return? It's stuff like this that makes me wary of any mainstream finance article.

[Souschef]

Quote:

Originally Posted by ivinsfan What scary letter, if you owe underpayment penalties or interest don't they show up and get included when you filed your return? It's stuff like this that makes me wary of any mainstream finance article.

I agree. I had a lot of LTCG's from funds I had not counted on. My TT software calculated the penalties as $9 federal and $3 state.It was not enough to worry about and file a 2210.

[skipro33]

Quote:

Originally Posted by Lakedog I do all withholding from fed pension as that is very simple and requires no extra effort to setup. Seems that withholding from pension or SS would be the easy way.

Exactly. Very easy for me to login and make a change on my pension tax deductions at any time. It is also easy to withhold federal tax from SS, but not as easy as through pension. SS requires you to print out form W-4V
https://www.irs.gov/pub/irs-pdf/fw4v.pdf
and drop it off at your local SS office. No appointment needed, there is a mail slot to just drop it in. The form allows you to select 7, 10, 12 or 22%.
This form does not withhold for state income taxes, but then Virginia, like California where I live, doesn't tax SS. If you were short on state income taxes to the tune of paying a penalty, I'd say the easiest method would be through your pension.