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

[Rianne]

Again, a newbie here. Thanks for the advice. I found from my AARP Taxslayer training we can use the Taxslayer practice lab and input all our info (using private passwords so no one else has access). Kind of like Pb4uski's favorite site:
https://www.irscalculators.com/tax-calculator
but with actual detailed entries and a return. Can adjust numbers, and change tIRA conversion and WD amounts. Can input prepayment or estimate and see what happens. This makes me realize we were paying $650 for about 15 minutes of data entry to our accountant. We did all the work putting the papers in order, and driving them over to the office

 

[OldShooter]

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.

Yes, widely varying income creates a downside where the safe harbor strategy might create a big overpayment with subsequent refund a few months later.

We just built a new lake home with a big chunk of the funds coming from tIRAs. I expect to work through that issue later this year as the 2023 tax bill is quite large compared to what 2024 will be. But laziness and sloth may push me toward giving Uncle an interest free loan of some the safe harbor funds instead of doing the dog work to estimate what the withholding should be.

 

[ShokWaveRider]

All great info here. I have one further question.

Our Tax TOTALs due for this year are ~17k, and are broken down as follows:

1) Actual Tax based on income is $~8k

2) ACA Premium repayment dure to underestimated income is ~$9k

For our 2024 withholding is the ACA repayment classified as taxes or just the Actual ~$8k?

Thanks

 

[sengsational]

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.

Not mine either, but I get a charge out of planning and having things align with the plan.

The extra step of doing a separate estimation step, then doing taxes "for real" doesn't appeal to me. So I "do my taxes for real" in December.

Decades ago I used the tax software feature to print out all of my inputs. So I had every field where I added information. I put that in a spreadsheet and refined it as things came and went. It's a single printed page. Using my personal finance software, I can fill in most fields with an exact amount, and the rest, with an estimate, and marked as such. With that sheet, I can do my taxes in a few minutes, iterate on tIRA withdrawal and/or Roth conversion and associated withholding. I tune it to owe a small bit. I do the same with the state tax.

So then I wait and do nothing while the tax software is finalized to allow eFile. Well, not quite; as the forms arrive in the mail, I replace the estimates, which typically are just for interest on cash, and off by a few bucks because I don't spend much time getting the estimates super accurate.

When they finally allow eFile, away it goes, most of the work done in December.

 

[cathy63]

All great info here. I have one further question.

Our Tax TOTALs due for this year are ~17k, and are broken down as follows:

1) Actual Tax based on income is $~8k

2) ACA Premium repayment dure to underestimated income is ~$9k

For our 2024 withholding is the ACA repayment classified as taxes or just the Actual ~$8k?

Thanks

There's a worksheet in the form 1040-ES instructions where you figure out what your estimated tax payments should be. Part of that calculation is to determine the smaller of 90% of this year's or 100% (or 110%) of the prior year's tax. The instructions for calculating the prior year's tax on line 12b of the worksheet say:

Use the following instructions to figure your 2023 tax. The tax shown on your 2023 Form 1040 or 1040-SR is the amount on Form 1040 or 1040-SR, line 24, reduced by:
1. Unreported social security and Medicare tax or RRTA tax from Schedule 2 (Form 1040), lines 5 and 6;
2. Any tax included on Schedule 2 (Form 1040), line 8, on excess contributions to an IRA, Archer MSA, Coverdell education savings account, health savings account, ABLE account, or on excess accumulations in qualified retirement plans;
3. Amounts on Schedule 2 (Form 1040) as listed under Exception 2, earlier; and
4. Any refundable credit amounts on Form 1040 or 1040-SR, lines 27, 28, and 29, Schedule 3 (Form 1040), lines 9 and 12, and Schedule H lines 8e and 8f.

Line 24 of the 1040 includes the APTC repayment from Schedule 2. APTC is not one of the exceptions mentioned in #3.

So my conclusion is that yes, the IRS includes the APTC repyament as a tax.

 

[ShokWaveRider]

There's a worksheet in the form 1040-ES instructions where you figure out what your estimated tax payments should be. Part of that calculation is to determine the smaller of 90% of this year's or 100% (or 110%) of the prior year's tax. The instructions for calculating the prior year's tax on line 12b of the worksheet say:

Use the following instructions to figure your 2023 tax. The tax shown on your 2023 Form 1040 or 1040-SR is the amount on Form 1040 or 1040-SR, line 24, reduced by:
1. Unreported social security and Medicare tax or RRTA tax from Schedule 2 (Form 1040), lines 5 and 6;
2. Any tax included on Schedule 2 (Form 1040), line 8, on excess contributions to an IRA, Archer MSA, Coverdell education savings account, health savings account, ABLE account, or on excess accumulations in qualified retirement plans;
3. Amounts on Schedule 2 (Form 1040) as listed under Exception 2, earlier; and
4. Any refundable credit amounts on Form 1040 or 1040-SR, lines 27, 28, and 29, Schedule 3 (Form 1040), lines 9 and 12, and Schedule H lines 8e and 8f.


Line 24 of the 1040 includes the APTC repayment from Schedule 2. APTC is not one of the exceptions mentioned in #3.

So my conclusion is that yes, the IRS includes the APTC repayment as a tax.

Schedule 2 includes the ACA repayments line 2 to be precise and according to the list above (Highlighted by me), it is reduced by that much.

So, Line 24 on 1040 is reduced by the ACA tax credit repayment. I hope I am not reading that wrong.....

 

[cathy63]

Any tax included on Schedule 2 (Form 1040), line 8, on excess contributions to an IRA, Archer MSA, Coverdell education savings account, health savings account, ABLE account, or on excess accumulations in qualified retirement plans;

Schedule 2 includes the ACA repayments line 2 to be precise and according to the list above (Highlighted by me), it is reduced by that much.

So, Line 24 on 1040 is reduced by the ACA tax credit repayment. I hope I am not reading that wrong.....

Yes, you are reading that wrong. That part of the instructions is specifically about Schedule 2 Line 8, not Schedule 2 Line 2. It's saying that if you had to pay a penalty for excess contributions to an IRA or other tax advantaged account in 2023, then you can subtract that penalty when calculating your safe harbor for 2024. Repayment of the advance premium credit is not anywhere in that list, nor could I find it anywhere in the 1040-ES instructions.

You might go through the 1040-ES worksheet yourself and see what you come up with. Remember that 90% of your 2024 tax is also a safe harbor, so if you won't have the APTC repayment this year, the worksheet will probably direct you to use that number for estimated taxes instead of the 2023 tax.

 

[ShokWaveRider]

Thanks Cathy. I think Turbo Tax will also come up with estimated taxes and provide me with forms to submit.

 

[cathy63]

Thanks Cathy. I think Turbo Tax will also come up with estimated taxes and provide me with forms to submit.

Yes. I just went through it yesterday because I did our taxes and it turned out that the default for the estimate vouchers is to take this year's number, add 10% and divide by 4. Like you, our 2023 situation is not like our 2024 situation, and the default would have us overpaying by a huge amount. I found that you can give it your 2024 info under Other Tax Situations / Other Tax Forms / Form W-4 and estimated taxes.

 

[imjustawarrior]

I found that you can give it your 2024 info under Other Tax Situations / Other Tax Forms / Form W-4 and estimated taxes.

Thanks for pointing this out. I just tried it and it came up with the same estimated tax that I had calculated by filling out a complete dummy tax return. Your method was much faster.

 

[rayvt]

Yes, the lazy person's tactic: In December take an IRA withdrawal at least equal to the safe harbor amount (100% or 110% of previous year's taxes) and designate it as 100% Federal withholding. Done. No estimating or tracking anything. Ever.

And then, in January take your RMD and do a 60-day rollover back to the IRA. That's if you have to take RMDs and you don't need the cash.

 

[rayvt]

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?

Yes, but you cannot withhold more than 100% of the payment. If you get $1000/mo but your need to withhold $5000, you cannot do it at the of the year.

Withdrawals from an IRA is about the only practical way to do it, because that's the only one where you have control over the amount.

 

[Gumby]

And then, in January take your RMD and do a 60-day rollover back to the IRA. That's if you have to take RMDs and you don't need the cash.

I have 8 years until RMDs, but that's how I will likely do it then.

 

[ShokWaveRider]

I will use the IRA Withdrawal & Withholding method when the CDs mature before reinvesting.

 

[jldavid47]

And then, in January take your RMD and do a 60-day rollover back to the IRA. That's if you have to take RMDs and you don't need the cash.

You can't do that. See Publication 590B for the gory details but RMDs are not eligible for rollovers back into retirement accounts:

"Distributions not eligible for rollover. Amounts that must be distributed (required minimum distributions) during a particular year aren't normally eligible for rollover treatment."

Any amounts over the RMD amount can be rolled over.

 

[Gumby]

I took it to mean that you can't put an RMD back into an IRA, but if you do a tax withholding distribution and subsequently an RMD, the IRS would not know and should not care whether the money for the rollover of the tax withholding distribution came from money you already had in your taxable account or money you got from your RMD.

 

[rayvt]

You can't do that. See Publication 590B for the gory details but RMDs are not eligible for rollovers back into retirement accounts:

Any amounts over the RMD amount can be rolled over.

Yes. I don't do it that way. The RMD is the RMD. Period.

The December 2023 IRA withholding is not part of my 2023 RMD.
The Jan 2024 withdrawal is part of the RMD for 2024. Now that I have that cash, I can do a 60-day rollover of that Dec'23 withdrawal back into the IRA.
Note that the 2023 EOY amount used to compute the 2024 RMD must include the rolled-back amount, even though it wasn't rolled back until after the end of year.

Scenario:
Tax owed: $10,000
RMD: $20,000

Dec 15, 2023, IRA withdraw $10,000, 100% withheld
Jan 10, 2024, withdraw $10,000 (as RMD), 0% withheld
Jan 11, 2024, Send $10,000 to IRA custodian, marked "60 day rollover"
Jan 20, 2024, withdraw $6,000 (as RMD) as QCD sent to your favorite charity.
Nov, 2024, withdraw $4,000 (as RMD). Go to Vegas.

Now your 2024 RMD is satisfied, and your 2023 tax is paid via withholding. No underwithholding penalty.

Note: due to sequencing rules, QCD is only QCD if it is part of the RMD. After the RMD has been taken out, no further withdrawal can be a QCD.

 

[jldavid47]

Yes. I don't do it that way. The RMD is the RMD. Period.

The December 2023 IRA withholding is not part of my 2023 RMD.
The Jan 2024 withdrawal is part of the RMD for 2024. Now that I have that cash, I can do a 60-day rollover of that Dec'23 withdrawal back into the IRA.
Note that the 2023 EOY amount used to compute the 2024 RMD must include the rolled-back amount, even though it wasn't rolled back until after the end of year.

Scenario:
Tax owed: $10,000
RMD: $20,000

Dec 15, 2023, IRA withdraw $10,000, 100% withheld
Jan 10, 2024, withdraw $10,000 (as RMD), 0% withheld
Jan 11, 2024, Send $10,000 to IRA custodian, marked "60 day rollover"
Jan 20, 2024, withdraw $6,000 (as RMD) as QCD sent to your favorite charity.
Nov, 2024, withdraw $4,000 (as RMD). Go to Vegas.

Now your 2024 RMD is satisfied, and your 2023 tax is paid via withholding. No underwithholding penalty.

Note: due to sequencing rules, QCD is only QCD if it is part of the RMD. After the RMD has been taken out, no further withdrawal can be a QCD.

I'm not sure that will work since you are only withdrawing the RMD amount in 2024. Maybe it does. At least I now know what the OP of the idea was getting at.

 

[Gumby]

I'm not sure that will work since you are only withdrawing the RMD amount in 2024. Maybe it does. At least I now know what the OP of the idea was getting at.

I think if you do this repeatedly every year, in all but the first year you are withdrawing the RMD amount every year, plus the amount needed for tax withholding and then rolling over the tax withholding amount back into your tIRA. Which you can do after you've done your full RMD for the year.

A perhaps easier to visualize scenario is this

Taxes safe harbor amount $10k in 2023, $11k in 2024
RMD $20k year in 2024, $22k year in 2025

15 Dec 2023 - tIRA distribution $10k all withheld for taxes.
02 Jan 2024 - make QCD $20k from tIRA
10 Jan 2024 - indirect $10k rollover from taxable to tIRA
15 Apr 2024 - pay any 2023 tax amount still due using funds in taxable account.


15 Dec 2024 - tIRA distribution $11k all withheld for taxes.
02 Jan 2025 - make QCD $22k from tIRA
10 Jan 2025 - indirect $11k rollover from taxable to tIRA
15 Apr 2025 - pay any remaining 2024 taxes using funds in taxable account.


and so on ...

Each year, you are making your full RMD (by using QCDs) and also withdrawing from tIRA to pay your taxes. Ultimately, you are taking the tax payment and putting it back in the tIRA, so you are funding your taxes from funds in your taxable account. The benefit from the tIRA withholding is that you can do it in December and it is counted as withheld over the course of the year so you don't have to file quarterlies and don't have to pay a penalty.

 

[pb4uski]

And then, in January take your RMD and do a 60-day rollover back to the IRA. That's if you have to take RMDs and you don't need the cash.

I don't think that works because the net effect is that you didn't take your RMD for the year.

....The Jan 2024 withdrawal is part of the RMD for 2024. Now that I have that cash, I can do a 60-day rollover of that Dec'23 withdrawal back into the IRA....

OK, I get it now that you have clarified that.

 

[audreyh1]

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.

In that scenario I drop back to the annualized income method for calculating estimated taxes. A lot more work but it sure saves way overpaying estimated taxes.

This hasn’t really been an issue in the last few years. Now due to IRMAA I actually attempt to hit a particular number each year. Thus overpaying estimated taxes is no longer likely and I have a shortcut out in Dec/Jan that where I modify or skip the last estimated payment on Jan15 if it looks like I’ve overpaid.

 

[TheWizard]

Not mine either, but I get a charge out of planning and having things align with the plan.

The extra step of doing a separate estimation step, then doing taxes "for real" doesn't appeal to me. So I "do my taxes for real" in December....
.

I do something like that but I just compute my projected AGI.
I hold only index funds in my taxable account so I get predictable dividends, but no CGDs.

I do this so I can figure how big a Roth conversion I can do before getting close to the next higher IRMAA tier.
I may stop these modest Roth conversions in a few years, so we'll see...

 

[EastWest Gal]

I need to thank this forum for alerting me to the EFTPS system.

https://www.eftps.gov/eftps/

I've been making quarterly payments for years, due to a dividend and cap gains earning portfolio, and yes, I have screwed them up and paid interest and penalty a couple of times. Last year I massively overpaid, so I'm living off the refund for the first three months this year. I don't lose sleep over paying the interest and penalty, as it hasn't been huge. The last couple of years I've set up quarterly payments through the EFTPS system. You can set up payments a year in advance at least, then just make sure you have the money in your account.

Payment dates are
April 15
June 15
September 15
January 15
Sometimes a day or two later due to weekends.

You need to set up an account in advance, and they will mail you a pin. You can also change your payment amounts as needed. Quarterly payments are no big deal, due to this system. As someone who is selling a bit of my portfolio for living expenses, this is what we do.

It will be another 8 years before I need to do RMDs from my IRA, so that is not an avenue open to me right now.

 

[temartin]

If I didn't have a small pension that I can use federal withholding to pay my estimate of my federal taxes due then I would use the method that Old Shooter desctibes above, but with a twist.

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.

The net impact is a Roth conversion for 101%, but with the benefit of effecively making an estimated payment of taxes in December that the IRS considers as done continually throughout the year in assessing any underpayment penalties. Just be careful to adhere to the timing of rollover contrbutions... perhaps do the first one in early December and do it one day later each subsequent year.

I don't think that works. This is a conversion, not an IRA rollover. The taxes withheld are considered a distribution, not a conversion. Only the 1% would be converted. You can't just subsequently contribute the 99% back into your Roth.

Has anyone actually done this and show me I'm wrong?

 

[tenant13]

I get a new credit card every time tax is due - with one payment I hit the bonus that I later use to book a business flight somewhere. Yes, there’s an about 1.8% surcharge but it works for me.