Tax Question re: Quarterly estimated tax payments

[Slow But Steady]

TL/DR - Why was I charged a penalty for failing to pay estimated taxes? I paid more than the total amount of the tax.

Is this the right forum for questions regarding taxes? If not, please steer me to the right place.

I'm pretty new at making quarterly tax payments. (Retired mid-2016.) For 2017, I just made quarterly estimated tax payments of one quarter of our 2016 tax.

For 2018, I estimated the tax based on an estimate of what our income including IRA withdrawals would be. For the first two quarters, I paid that estimate ($6200 each quarter). When the third quarter came around, I hadn't yet taken an IRA withdrawal, so I figured I could skip the quarterly payment.

In November, the Schwab guy suggested I should be making IRA withdrawals to minimize the amount of my required minimum distributions which will start in 6 more years. In November, I withdrew an amount that was greater than the sum of all all our other income for the year.

Having made that withdrawal, and because I needed a bunch of Southwest Airline points, in early January I made a quarterly payment by credit card that was enough so that I ended up getting a large refund.

Last week I got a letter from the IRS saying that I had been charged a penalty of $105.75 for failing to pay estimated taxes. Curious about why that would be, I went back to my tax prep software to perform a simulation. What I found is that if I had not taken the large IRA distribution, my income tax would have been zero, and the estimated tax I had already paid would have been more than sufficient.

I also looked more closely at the 1099R forms, and I found that they don't have a date for the distribution, so the IRS had no way to know that I took that income very late in the year.

I don't think it would be a good use of my time to fight with the IRS over $105.75, but I would like to know if there is anything I could have done to show the timing of the income and the resulting impact on the estimated tax calculations.

Can anyone advise me?

 

[RunningBum]

You'll probably have to fill out form 2210 to show when income was received, when tax payments were made, and when any itemized deduction expenses actually occurred. They probably assumed the IRA distributions were evenly distributed throughout the year and you fell behind by missing the 3Q estimate payment. You should be able to submit an amended return with the 2210 included.

 

[kaneohe]

Running Bum is correct. The general rule is that your 4 estimated tax payments should be the same for a simple life. That is because IRS assumes that your income is received evenly during the year and expects taxes to be paid the same way.

If you like a more exciting life, then you can pay estimated taxes scaled to the income each quarter. Then you get the pleasure of filling out Sch AI of F2210 which shows the time variation of income and deductions. Everyone should do it at least once during your lifetime..........it's like doing your taxes 4x.
Perhaps your tax software will do the calculation for you so it's not quite so bad.

You might want to provide some feedback to your Schwab guy so he is more aware of the consequences of his advice.

 

[pb4uski]

You need to fill out a Form 2210 and use the annualized income installment method... Schedule AI on page 4... it essentially does a YTD tax calculation through March, May, August and December to demonstrate that your YTD estimated payments for each of those periods exceeded your tax.

The reason that they look at things quarterly is to prevent someone with a big tax bill to just make a big payment in December or January after having used the money all year. With this schedule you deomonstrate that your estimated payments corresponded with your obligation for taxes.

Another thing to keep in mind if you do this again... if you make the estimated payment as a withholding... say a withholding of that big tIRA distribution late in the year... the IRS counts withholdings as beign made evenly throughout the year no patter when the withholding is done.

Given what you describe in the OP thie Schedule AI should eliminate or at least substantially reduce the penalty.

 

[Slow But Steady]

Thanks for the advice, friends.

I started filling out the 2210 form. It's a bit cumbersome, because I sell some covered calls, and got a couple lots called away, which resulted in some capital gains. If it takes me more than an hour to do the first quarter, I may just figure that the $105 is the cost of the lesson to make four equal payments from now on.

 

[audreyh1]

TL/DR - Why was I charged a penalty for failing to pay estimated taxes? I paid more than the total amount of the tax.

Is this the right forum for questions regarding taxes? If not, please steer me to the right place.

I'm pretty new at making quarterly tax payments. (Retired mid-2016.) For 2017, I just made quarterly estimated tax payments of one quarter of our 2016 tax.

For 2018, I estimated the tax based on an estimate of what our income including IRA withdrawals would be. For the first two quarters, I paid that estimate ($6200 each quarter). When the third quarter came around, I hadn't yet taken an IRA withdrawal, so I figured I could skip the quarterly payment.

In November, the Schwab guy suggested I should be making IRA withdrawals to minimize the amount of my required minimum distributions which will start in 6 more years. In November, I withdrew an amount that was greater than the sum of all all our other income for the year.

Having made that withdrawal, and because I needed a bunch of Southwest Airline points, in early January I made a quarterly payment by credit card that was enough so that I ended up getting a large refund.

Last week I got a letter from the IRS saying that I had been charged a penalty of $105.75 for failing to pay estimated taxes. Curious about why that would be, I went back to my tax prep software to perform a simulation. What I found is that if I had not taken the large IRA distribution, my income tax would have been zero, and the estimated tax I had already paid would have been more than sufficient.

I also looked more closely at the 1099R forms, and I found that they don't have a date for the distribution, so the IRS had no way to know that I took that income very late in the year.

I don't think it would be a good use of my time to fight with the IRS over $105.75, but I would like to know if there is anything I could have done to show the timing of the income and the resulting impact on the estimated tax calculations.

Can anyone advise me?

I would recommend that you reply with an explanation that includes form 2210AI, and show you received the IRA distribution after Sept 30. At the very least it should reduce the penalty significantly. This is not a fight, they will accept this new information.

 

[Badger]

I send in my quarterly tax payment on the date IRS requires (maybe a day or two late sometimes). But in 2017 my wife took her RMD for the first time and I had to pay a little more at the end of the year but no penalty. This year we had quite a large capital gains that more than doubled our taxes but I am hoping that will be overlooked due to new tax schedules. I hope I have it covered this year since I will be taking RMD but no capital gains. After that I will have the RMD on auto pilot and things should be easier for a more accurate quarterly payment. Even with standard deduction the correct/accurate payment of taxes has been annoying with so many changes in the past few years.



Cheers!

 

[audreyh1]

If you the amount you paid in estimated taxes equaled the prior year taxes (or 1.1x the prior year’s taxes if joint taxable income exceeded $150K the prior year) then it doesn’t matter if income doubled the next year. You reached safe harbor.

For 2018 they even dropped the requirement for even payments of the estimated taxes if you at least met the 85% of what you owed rule (maybe modified to 80%). For 2019 back to the old rules.

 

[kaneohe]

..................................................

For 2018 they even dropped the requirement for even payments of the estimated taxes if you at least met the 85% of what you owed rule (maybe modified to 80%). For 2019 back to the old rules.

True to the 80% mod but I believe that applies to the then current yr (2018)
tax safe harbor, not prior yr safe harbor.

 

[Bamaman]

I just have Fidelity hold back 15% of any Rollover IRA distributions whenever they're withdrawn. They can also hold back and distribute state income taxes too.

 

[GalaxyBoy]

In addition, amounts withheld from IRA distributions for taxes are considered paid evenly throughout the year, even if made in a lump sum payment at year-end. This is my strategy for the next few years since I have an inherited IRA that requires me to take RMDs even though I’m not yet age 70.5.

 

[Sunset]

If you the amount you paid in estimated taxes equaled the prior year taxes (or 1.1x the prior year’s taxes if joint taxable income exceeded $150K the prior year) then it doesn’t matter if income doubled the next year. You reached safe harbor.
....

This is what we do, as one year the IRS and State hit us with penalties, and the State was high at $250. All due to a mutual fund suddenly declaring a 70K capital gain at the end of the year.

So now I just pay 1.1 times previous yr tax bill, spread over the 4 payments. That form 2210AI, is too hard so I want to avoid it.

Sometimes it means a big refund, but then that also means the next set of estimated payments is much lower.

 

[audreyh1]

This is what we do, as one year the IRS and State hit us with penalties, and the State was high at $250. All due to a mutual fund suddenly declaring a 70K capital gain at the end of the year.

So now I just pay 1.1 times previous yr tax bill, spread over the 4 payments. That form 2210AI, is too hard so I want to avoid it.

Sometimes it means a big refund, but then that also means the next set of estimated payments is much lower.

I hate getting refunds more than filling out form 2210AI. I only use the 1.1x prior year’s taxes if I’m pretty sure that current year taxes are going to be higher than prior year taxes. I adjust in Q4 if it appears that we might overpay. Otherwise I track quarterly income and use the annualized income method to pay estimated taxes owed so far and keep all the quarterly data for later filling out the form 2210AI.

 

[kaneohe]

For your 2018 return only, there is a special waiver of penalty if you paid at least 80% of your total taxes for the yr by withholding and/or estimated taxes.
Usually the timing of estimated taxes paid is important but for this waiver only, timing doesn't matter (as long as you paid by Q4 deadline). You only have to fill out Pt I of the 2210 and complete the simple wksht on p.2,3 of the 2210 instructions and write the note about 80% waiver on your 2210.

80% Exception Worksheet
Complete Part I of Form 2210. If you checked
“Yes” on box 9, complete the worksheet below
to see if you qualify for the 80% Waiver relief.
Before you begin:
1. Enter the amount from Form 2210, Part I, line 4 here ........
2. Multiply line 1 by 80% ..........................
3. Enter your withholding taxes from Form 2210, Part I,
line 6. .....................................
4. Enter the amount of your 2018 estimated tax payments made on
or before January 15, 2019. .......................
5. Add lines 3 and 4 above. .........................
6 . Is line 5 above greater than or equal to the amount on line 2
above? ....................................
Yes. You qualify for the 80% Waiver relief.
Check Box A in Part II of Form 2210,
write “80% Waiver” next to Box A, and
file page 1 of Form 2210 with your return.

No.
STOP
You do not qualify for the 80% Waiver
relief. Follow the instructions for the
“Yes” box on line 9 of Form 2210, Part I,
ignoring the 80% Waiver.

 

[ER Eddie]

I just started making estimated tax payments this month. My last tax bill was atrocious, in part because I underpaid. My CPA advised me last year to start making estimated tax payments, but I didn't listen. Now I'm listening.

I don't think it would be a good use of my time to fight with the IRS over $105.75...

Can anyone advise me?

Hire a lawyer and fight them. Don't give in to the Man.

 

[kaneohe]

TL/DR - ...........................................

Can anyone advise me?

see post #14 a few posts above re: special 80% waiver if you qualify. You can still do it perhaps for 2018 instead of paying the penalty.

 

[bingybear]

Tax payments are not equal or quarterly.
When you "make quarterly, the payments have 4 pay by dates. However, they are not every 3 months. I think you can still have a penalty if you pay enough but pay late.

IIRC paying by withholding can be paid independent of of quarterly dates. This is how employers pay your taxes.

I have not dug into this, but I would think withholding from a roth conversion should work to even if you repay the taxes in time to your TIRA.

There are several safe harbors (ways to not get penalized).
I would give the penalty form a read so you have a basic understanding of it. At least you will realize why you run into a penalty.

 

[RunningBum]

I have not dug into this, but I would think withholding from a roth conversion should work to even if you repay the taxes in time to your TIRA.

It's better to pay taxes from outside the conversion (from your taxable account) than from the conversion. This was if you convert $10K, $10K moves over to the Roth rather than $10K-taxes.

I don't understand the last part "even if you repay the taxes in time to your TIRA." That seems like it would be considered a recharacterization, no longer allowed on a conversion, or a contribution, which requires earnings.

 

[kaneohe]

..................................

I don't understand the last part "even if you repay the taxes in time to your TIRA." That seems like it would be considered a recharacterization, no longer allowed on a conversion, or a contribution, which requires earnings.

I think that's considered a 60 day rollover...............you took C + W out of TIRA, converted C to Roth, sent W to IRS and then replaced W back in TIRA
in timely manner and hopefully didn't violate the once per 365 day rule on rollovers.

 

[RunningBum]

I think that's considered a 60 day rollover...............you took C + W out of TIRA, converted C to Roth, sent W to IRS and then replaced W back in TIRA
in timely manner and hopefully didn't violate the once per 365 day rule on rollovers.

OK, thanks, I think that makes sense, but I wonder if that really works in practice. You tell your financial institution you want to convert $10K, and have them withhold 12%. They put $8800 in your Roth and pay $1200 in taxes. Can you then say, hey, that $1200, I'm actually going to roll that back into my tIRA (or a different tIRA if that's required)? Would they really be able to adjust the 1099-R?

My understanding of this is it's for when you want to rollover an IRA from one firm to another. You could do it directly, or you can have them send a check, and within 60 days you have to put it in another IRA, or else it's a distribution. But in this case they didn't send you a check. Is that not necessary for this to work? Has anyone actually done this?

 

[ChrisC]

OK, thanks, I think that makes sense, but I wonder if that really works in practice. You tell your financial institution you want to convert $10K, and have them withhold 12%. They put $8800 in your Roth and pay $1200 in taxes. Can you then say, hey, that $1200, I'm actually going to roll that back into my tIRA (or a different tIRA if that's required)? Would they really be able to adjust the 1099-R?

My understanding of this is it's for when you want to rollover an IRA from one firm to another. You could do it directly, or you can have them send a check, and within 60 days you have to put it in another IRA, or else it's a distribution. But in this case they didn't send you a check. Is that not necessary for this to work? Has anyone actually done this?

Haven't done it yet, but planning to do it this year. It has been reported elsewhere in the Bogelheads forum that this has been done. I checked with our tIRA and Roth custodians and they confirm the validity of this tax withholding and rollover/conversion approach. And every time we have done prior conversions we have been given the opportunity to withhold federal and state income taxes with the conversion.

I confirmed I could do it two ways: (1) obtain a check from 401k custodian to roll over the funds to a Roth IRA custodian and withhold income taxes of 10-20 percent, deposit check into Roth IRA within 60 days along with the withheld taxs amount from your taxable funds; or (2) obtain check from 401K custodian without withholding any taxes, rollover check into tIRA and then later transfer/convert from tIRA to Roth IRA (this is the same custodian as our tIRA), withhold Federal and State taxes and pay the withheld amount separately from taxable funds into the Roth IRA.

 

[RunningBum]

Haven't done it yet, but planning to do it this year. It has been reported elsewhere in the Bogelheads forum that this has been done. I checked with our tIRA and Roth custodians and they confirm the validity of this tax withholding and rollover/conversion approach. And every time we have done prior conversions we have been given the opportunity to withhold federal and state income taxes with the conversion.

I confirmed I could do it two ways: (1) obtain a check from 401k custodian to roll over the funds to a Roth IRA custodian and withhold income taxes of 10-20 percent, deposit check into Roth IRA within 60 days along with the withheld taxs amount from your taxable funds; or (2) obtain check from 401K custodian without withholding any taxes, rollover check into tIRA and then later transfer/convert from tIRA to Roth IRA (this is the same custodian as our tIRA), withhold Federal and State taxes and pay the withheld amount separately from taxable funds into the Roth IRA.

Cool, good info.

 

[kaneohe]

OK, thanks, I think that makes sense, but I wonder if that really works in practice. You tell your financial institution you want to convert $10K, and have them withhold 12%. They put $8800 in your Roth and pay $1200 in taxes. Can you then say, hey, that $1200, I'm actually going to roll that back into my tIRA (or a different tIRA if that's required)? Would they really be able to adjust the 1099-R?

My understanding of this is it's for when you want to rollover an IRA from one firm to another. You could do it directly, or you can have them send a check, and within 60 days you have to put it in another IRA, or else it's a distribution. But in this case they didn't send you a check. Is that not necessary for this to work? Has anyone actually done this?

Good questions! I haven't done it but I believe I've seen Alan S. at fairmark.com suggest this and if my memory is correct, then it should be correct since it's coming from the IRA guru. I'm in the process of seeing what he says. In the meantime, here's my pet theory.........the 1099-R is somewhat irrelevant for the taxable amount........there is that infamous box in 2b) taxable amount not determined..................which , in my opinion, should always be checked since the 1099-R provider does not know if you have non-deductible contributions, are making a QCD, doing a rollover,etc. All you know from the 1099R is the gross distribution and the withholding. You determine the taxable amount and let IRS know why it differs by coding QCD, rollover, or providing the 8606.

 

[gerntz]

We don't make Q payments. Just have IRA holder pay the income taxes directly as part of IRA distribution - we never see/touch the money. Regardless of when in the year that is, IRS considers (It's the law?) the payment to be equally distributed throughout the year. I find this one time form fill out & payment approach simpler. Going on 8 years now.

 

[ChrisC]

Good questions! I haven't done it but I believe I've seen Alan S. at fairmark.com suggest this and if my memory is correct, then it should be correct since it's coming from the IRA guru. I'm in the process of seeing what he says. In the meantime, here's my pet theory.........the 1099-R is somewhat irrelevant for the taxable amount........there is that infamous box in 2b) taxable amount not determined..................which , in my opinion, should always be checked since the 1099-R provider does not know if you have non-deductible contributions, are making a QCD, doing a rollover,etc. All you know from the 1099R is the gross distribution and the withholding. You determine the taxable amount and let IRS know why it differs by coding QCD, rollover, or providing the 8606.

I'm misunderstanding the issue with the 1099-R. Once you have taken a rollover (and it's considered a distribution when it's a conversion from tIRA to Roth IRa) from a tIRA, isn't a 1099-R always cut and doesn't the 1099 say whether you've had withholding from the distribution/rollover? Whether you transfer amounts withheld is a separate issue, isn't it? I'm not seeing the issue here.