taking distributions and taxes

[kongmen]

I just took a distribution this week and I had the broker withhold 10%federal and 2%state. When I file taxes next year will I have to pay a penalty for not withholding enough because I'm in the 22% tax bracket?


Thanks for any replies.

 

[SevenUp]

Withholding for any single item of income doesn't matter. What matters is total amount of withholding for your total income and consequent tax liability.

 

[Al18]

SevenUp is correct.

Tax bracket is meaningless for withholding purposes, in my opinion. If your effective tax rate last year is 10%, and your yearly spend will be about the same, I would withhold 12% Federal tax.

If you determine in November or December that you will owe more than $1000 in taxes, you can take a small distribution then and have 100% of it be withheld for taxes.

 

[kongmen]

Humm...ok

 

[Rianne]

So if taxable income is 0, then base the tIRA tax on the current year taxable. If MFJ and take $20K from tIRA, then withhold 10%. That's how I understand it.

 

[Gumby]

SevenUp is correct.

Tax bracket is meaningless for withholding purposes..
.....

I disagree with this premise. OP says he is in the 22% marginal bracket, which implies that he has other income that puts him there. I assume that this distribution is in addition to that other income. Accordingly, his taxes will increase by 22% of the distribution, not by the overall effective tax rate.

I do agree that he should make another estimate of taxes late in the year and take an all-withholding distribution to get within either safe harbor (100% of prior year tax or owing less than $1000)

 

[kongmen]

"I disagree with this premise. OP says he is in the 22% marginal bracket, which implies that he has other income that puts him there. I assume that this distribution is in addition to that other income. Accordingly, his taxes will increase by 22% of the distribution, not by the overall effective tax rate"


Yes we have other income by it's self that puts us in the 22% bracket.

 

[RetireBy90]

So if you owe 22% for the small distribution, then your total tax obligation will increase by 22%. You have paid 10% so the distribution will add another 12% to total obligation. However, lots of things come into play. Have your other withholding been more than your tax obligation. With my withholding it never exactly matches the obligation so if you normally have to pay when filing, I would think you should pay another 12%, if you get a refund, then you will probably owe less than the 12%.
There is also the safe harbor of 110% of last year’s tax obligation, so if you have withheld or done other payments that equal 110% no penalty should be assessed.
Not all that complicated but hard for me to explain.