What is the best way to pay estimated Federal Taxes in Retirement?

[Wile E. Coyote]

Some people may have gotten away with this (power to you!), but it is not what the IRS says. Here is a summary from Turbo Tax:

Myth 1: You can pay your taxes in a lump sum at the end of the year
One of the more serious misconceptions taxpayers often have is that they can just pay their taxes in one lump sum at the end of the year. It's a mistake to think the IRS is OK with an end-of-year payment.

If you owe more than $1,000, the IRS wants you to pay your tax throughout the year.
Any missed payment will typically result in penalties and interest.
Waiting until the end of the year to file and pay taxes may lead to other financial issues if you fail to reserve enough funds to satisfy your tax debt.
We cover how to pay quarterly estimated taxes here.

Myth 2: Missing a estimated quarterly taxes payment deadline is fine as long as you pay on the next deadline
If you have to make estimated tax payments, following the schedule is important.

Missing quarterly deadlines, even by one day, can mean accruing penalties and interest.
If you miss a payment deadline, your best bet is to send your payment as soon as you can.
You can also appeal IRS penalties. The IRS would rather collect tax payments than collect penalty payments, so penalties you incur might be forgiven.

Why don't you make a double or triple payment one year and then continue to pay at end of year. This way you have a credit on your account that rolls forward and protects you against any timing issues?

 

[ShokWaveRider]

You think they (The powers that be) would make it easier for us old retired folk. Too much to ask I guess.

 

[MdaPetralia]

...In December, I would do a Roth conversion for 101% of what I want to pay for estimated taxes and have 99% federal tax withholding. Then I would transfer from my brokerage account to my Roth and amount equal to the federal withholding as a rollover contribution...

Good tip for those over 59 1/2!

As for those under 59 ½ (includes me!), taxes withheld during a ROTH Conversion are considered an early withdrawal and are subject to a 10% penalty.

 

[qwerty3656]

like others have said, I make a withdrawal from my IRA at the end of the year equal to my estimated tax liability and withhold 100%

 

[Ronstar]

I pay quarterlies out of checking .only $1300

 

[pb4uski]

So, for those receiving a modest pension, we can increase our federal withholding percentage at the end of the year to pay for the federal taxes due for that year?

That would depend on the situation, probably not for the whole thing since you only have a few pay periods left.

What I do is estimate my tax for 2024 in January... our income and income tax is very predictable since most of our taxable income is from Roth conversions that I can control. Then divide the tax for the year by 12 and set my monthly federal tax withholding to that amount

I filed my tax return yesterday. We owed $16.

 

[pb4uski]

Glad it works for you. I am far too lazy to do all that work ...

It's called tax planning.

 

[pb4uski]

So, this is the work around, this is classified as a withholding not an estimated payment, so a one-time distribution with 100% withheld should work and eliminate the need for quarterly estimated payments. No matter when in the tax year the distribution and withholding take place. Even if the amount also covers taxable CD income distributed monthly??

Yes.

 

[pb4uski]

This is true for estimated tax requirements, but is not true for withholding strategies which can effectively replace the estimated tax requirements.

+1

 

[pb4uski]

I don’t think so as withholding any time during the year is treated as evenly paid throughout the year. So as long as you withhold enough, even at year end, to cover prior year taxes safe harbor amount, you are golden.

Using withholding is a common way to cover estimated taxes. It’s just that opportunities to withhold taxes are limited: IRA withdrawals, SS, pension. If you don’t have those scenarios you have to pay estimated taxes directly.

Also tax refunds can be applied to following year estimated taxes on your 1040.

Nailed it.

 

[fosterscik]

I find EFTPS to be the most straightforward/easiest for me. I don’t have any withholding opportunities. I usually use the safe harbor rules base on prior year taxes. Then I can schedule all 4 estimated tax payments in EFTPS at once. I often do this after completing our tax return.

I believe the 110% rule for safe harbor starts at prior AGI $150K for MFJ.

Exactly what I do for our taxes. My EFTPS withdrawals for 2024 are already scheduled for 100% of our 2023 bill.

 

[pb4uski]

But, if you are subject to RMDs, take the full RMD first. Then pay the taxes with the Roth conversion process.

I'm not subject to RMDs but if you do both RMD and Roth conversion I would do the tax withholding from the RMD and then do the Roth conversion with no federal tax withholding so the full amount of the conversion ends up in the tax-free Roth.

 

[pb4uski]

Good tip for those over 59 1/2!

As for those under 59 ½ (includes me!), taxes withheld during a ROTH Conversion are considered an early withdrawal and are subject to a 10% penalty.

True. I should have mentioned that.

 

[Rianne]

Great thread. I'm doing taxes for AARP clients (new to this). I've completed about 20 tax returns so far this year and have seen a few clients who did not know or understand prepayment, estimated payment obligations, and their penalties took them by surprise. One penalty was > $1000, long story about IRA withdrawals younger than 59 1/2 and what they used the $$ for. Vacation. Sad.
I am tired of paying $650 to an accountant who was unsure if I could contribute to my Roth for 2023 this month. I can and I know it.
I just set up our EFTPS, thank you thread. Will take a couple of weeks.
Our scenario is simple. tIRA w/d, SS, some taxable interest from CDs, LTCG, STCG, and dividends which are reinvested. Would one of the posters give an example of such a scenario? I want to do the one-and-done payment. Again, I'm still a newbie and doing our own taxes but will do them in 2024 via Taxslayer.

 

[Chuckanut]

If a person is interested in buying more of the 1.3% Ibonds, a fat tax payment for 2023 can be used to get the $5000 worth of bonds over and above the normal $10,000 yearly limit.

However, I am not sure if you can send an extra estimated 2023 income tax payment this late since the 4th quarter payment was due in mid January.

 

[pb4uski]

Great thread. I'm doing taxes for AARP clients (new to this). I've completed about 20 tax returns so far this year and have seen a few clients who did not know or understand prepayment, estimated payment obligations, and their penalties took them by surprise. One penalty was > $1000, long story about IRA withdrawals younger than 59 1/2 and what they used the $$ for. Vacation. Sad.
I am tired of paying $650 to an accountant who was unsure if I could contribute to my Roth for 2023 this month. I can and I know it.
I just set up our EFTPS, thank you thread. Will take a couple of weeks.
Our scenario is simple. tIRA w/d, SS, some taxable interest from CDs, LTCG, STCG, and dividends which are reinvested. Would one of the posters give an example of such a scenario? I want to do the one-and-done payment. Again, I'm still a newbie and doing our own taxes but will do them in 2024 via Taxslayer.

In the situation that you describe, I would just do federal tax withholding from tIRA withdrawals... either throughout the year or just a special withdrawal with 99% FWT in December. No need for EFTPS IMO.

 

[pb4uski]

If a person is interested in buying more of the 1.3% Ibonds, a fat tax payment for 2023 can be used to get the $5000 worth of bonds over and above the normal $10,000 yearly limit.

However, I am not sure if you can send an extra estimated 2023 income tax payment this late since the 4th quarter payment was due in mid January.

Yes, you can. I did it a couple years ago. Did my taxes and had small refund but wanted to buy $5k of ibonds so I made an estimated tax payment sufficient to bring my refund to $5,000 and then did the form to get my refund in ibonds.

 

[OldShooter]

It's called tax planning.

Everybody needs a hobby, I guess. This is not one of mine though.

Beyond a ballpark guess, I never know what my last year taxes will be until I get H&R Block purchased and filled in. All I need to know is my safe harbor number.

 

[statsman]

Everybody needs a hobby, I guess. This is not one of mine though.

I'm in the same boat, re: estimated taxes. Some people have no issue with paying taxes that way, and some may even prefer it. I'm not one of those individuals. I told myself I would do everything I could to avoid having to go the estimate taxes route. So far, we haven't been required or have a need.

Retirement seven years ago started with my modest pension, DW's SS @ 65, and a small inherited IRA. Usually the withholding from the pension took care of the taxes, but on a couple of occasions, I withheld from the inherited IRA distribution in December. Starting next year, we'll have my SS and DW's first year with an IRA RMD.

 

[OldShooter]

... Our scenario is simple. tIRA w/d, SS, some taxable interest from CDs, LTCG, STCG, and dividends which are reinvested. Would one of the posters give an example of such a scenario? I want to do the one-and-done payment. ...

Don't worry about any of that stuff. Calculate your safe harbor amount (100% or 110% of last year's taxes) and pay it. Done.

If you can pay via tIRA withholding you can pay any time of the year. (I think most of us pay in December.) If the withholding move cannot be made, several here have recommended dividing your safe harbor number into quarters and paying it as quarterly estimated tax payments. That sounds logical to me but I have never actually done it.

If you have state income taxes, you might want to verify the the withholding move will work there. It does for several of us.

 

[rk911]

Each January I set up the four quarterly payments via the EFTPS website. EZ PZ. I calculate the 'safe harbor' number.

https://www.irs.gov/payments/eftps-the-electronic-federal-tax-payment-system

I do the same with state tax estimated payments on the IDOR website.

 

[pb4uski]

Everybody needs a hobby, I guess. This is not one of mine though.

Beyond a ballpark guess, I never know what my last year taxes will be until I get H&R Block purchased and filled in. All I need to know is my safe harbor number.

Mine takes 5 minutes a year since I already know that my total income will be the income to the top of the 0% preferenced tax bracket since I use Roth conversions to force that to happen. The only thing that I don't know is how much income is ordinary vs preferenced but the taxes are not hugely sensitive to that.

 

[jollystomper]

...
Our scenario is simple. tIRA w/d, SS, some taxable interest from CDs, LTCG, STCG, and dividends which are reinvested. Would one of the posters give an example of such a scenario? I want to do the one-and-done payment. Again, I'm still a newbie and doing our own taxes but will do them in 2024 via Taxslayer.

Maybe this will help. Here is what I have done. While in the past I tried to figure out exactly the amount of tax owed (not a chore as I like playing with numbers ), I decided to follow Old Shooters advice to just go with the safe harbor amount, and have more time to enjoy the Holiday Season . So...

1. Our federal tax due for tax year 2022 was 10,500.
2. Our income matched the "100% safe harbor" criteria.
3. I had $5,000 of federal tax withheld from my pension, so to make the "safe harbor" I need $5,500 in additional withholding.
4. In early December I did one 401K withdrawal (could have done it from my tIRA, but my priority for that account is Roth conversions) and designated $5,500 of it for federal taxes.
5. The 1099-R I received from my 401K administrator (Fidelity) for tax year 2023 reflects $5,500 in box 4 (Federal income tax withheld).
6. My tax liability for tax year 2023 will be $11,000. So I will send in a payment of $500, which is not a big deal. But no penalty. Even if I owed more, still no penalty, as my withholding from my pension and 401K withdrawal exceeded my tax year 2022 amount due.

 

[Phroig]

The 110% safe harbor doesn't always work well. I did a big Roth conversion last year. For various reasons, I'll do a much smaller one this year. 110% of last year's tax will be a substantial overpayment for me.

 

[VFK57]

It is difficult to get money back from the IRS on any amendment you might make to the original Tax Return. I usually do an estimate on our Taxes on the Turbo Tax with the income we have and send quarterly the estimates.