tax withholding for ERs

[JohnEyles]

I'm trying to figure out if I can avoid having to do estimated tax
payments, simply by having tax withheld from annuity payments
(reported on 1099-R).

I recall a rule that applied when withholding from wages on a W-2,
that said amounts withheld were considered to be withheld evenly
over the entire year, even if they weren't really withheld evenly.
For example, if you saw you were heading towards an underpayment
penalty, you could increase your W-2 withholding dramatically for,
say, the last two pay periods of the year, and be fine.

I'm wondering if this same rule applies to other kinds of withholding,
specifically that from an annuity reported on 1099-R forms.

I've perused Publication 505 and can't seem to find an answer -
but, I can't find the rule I recall for W-2 withholdings either.

 

[Nords]

I'm trying to figure out if I can avoid having to do estimated tax payments, simply by having tax withheld from annuity payments (reported on 1099-R).

I don't know the answer, but the form used for checking witholding against income is 2210AI (annualized installments). It might have the info you're looking for.

But here's another question: If you can hold onto your money for an additional 1-3 months by making estimated tax payments, and put that money in an account earning 5% APY, is it worth your time to continue making estimated payments?

 

[Martha]

I think you are ok, but I won't say so under oath.

Publication 505 says:

You must pay estimated tax for 2007 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2007, after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of:
   1. 90% of the tax to be shown on your 2007 tax return, or
   2. 100% of the tax shown on your 2006 tax return. Your 2006 tax return must cover all 12 months.

So, if you withhold enough you will be fine, even if you withhold a lot more for the last couple of checks for the year. The question is what kind of penalty gets charged if you end up not withholding enough. This is where it is important to know if the presumption applies that the withholding was even throughout the year. If so, that could result in a lower penalty. I do not know the answer to that question. You could ask on the Fairmark Forum if no one here knows. Fairmark Forum

 

[old woman]

It is even over the year when withheld from pensions or wages.
I withhold my December pay for taxes some years.

 

[JohnEyles]

It is even over the year when withheld from pensions or wages.

So the rule that I relied on, during my working life, for withholding
shown on a W-2, also applies to withholding shown on a 1099-R ?

 

[JohnEyles]

I asked my question again at google-group misc.taxes.moderated,
and the nice oflks there answered in the affirmative (1099
witholding is considered spread evenly throughout year, same
as W-2 witholding) but pointed out it MAY be to one's advantage
to override this default. Below is my query to that group,
followed by several of the better answers ...

> When I was a W-2 employee, there was a nice rule that said
> that ALL money withheld from my wages were considered to be
> evenly withheld throughout the year, regardless of when they
> were actually withheld. For example, if forseeing a big
> underpayment penalty, one could dramatically increase one's
> withholding for the last few pay periods.
> I'm wondering if the same rule applies to withholding on
> 1099s - the 1099-R (for annuties and pensions) in particular?


Yes. All withholding from all sources is treated the same.
It's spread evenly through the year unless you elect on Form
2210 to have it applied as withheld. See IRS Publication
505.

******

Considering withholding as evenly withheld throughout the
year is the default setting. Optional is proving that it was not.
Thus if you got a large IRA withdrawal in March, it might
behoove you to use actual withholding per quarter instead of
the optional default method.

******

Yes John ALL withholding may be treated as averaged or in
the specific period it was withheld, Many seniors with RMDs
don't pay installments but have their RMD agent withhold
enough tax to either meet the last year's tax safe harbor,
or the 90% of current year's tax safe harbor. This has a
lot of advantages of Leaving money in the IRA for the
longest time, paying the taxes in December out of funds
drawn in December, no installment concerns or form 2210 or
penalties.
Be sure yur IRA Aagent is willing, can you just tell them
verbally or must they have something in writing. How much
leadtime because it must be withheld in December or earlier.
etc.