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

[Healthy Lifestyle]

To me the easiest way to estimate taxes is using an online calculator like https://www.dinkytown.net/java/1040-tax-calculator.html. The 2024 version should be available soon, and it will handle your situation no matter how simple/complex/unique.

I just discovered the dinkytown finance calculator and used it for the first time to get an estimate of 2023 and 2024 taxes.

I also continued on to estimate my future years of RMD income which was/is informative.

My question is does dinkytown stack up well compared to other favored finance calculators for reliable estimates?

 

[pb4uski]

I just discovered the dinkytown finance calculator and used it for the first time to get an estimate of 2023 and 2024 taxes.

I also continued on to estimate my future years of RMD income which was/is informative.

My question is does dinkytown stack up well compared to other favored finance calculators for reliable estimates?

Pretty good in my experience but my taxes are very simple.

I will add that the TT What-If Worksheet is really good too.

 

[Gotadimple]

I just discovered the dinkytown finance calculator and used it for the first time to get an estimate of 2023 and 2024 taxes.

I also continued on to estimate my future years of RMD income which was/is informative.

My question is does dinkytown stack up well compared to other favored finance calculators for reliable estimates?

They have some very useful calculators, and the taxes one works for me for planning purposes. Some banks and credit unions have calculators on their websites - they use Dinkytown products.

 

[Gumby]

I estimate my taxes every year using nothing more than a pencil and sheet of notebook paper. That way, I know precisely what assumptions are made and I can be sure the calculation is correct. If I am contemplating whether to take certain actions, I might prepare a couple of scenarios, such as with or without Roth conversions. I am usually very accurate in my estimates.

I first estimated 2024 taxes in June 2023, adjusted my figures as necessary in November 2023, as more data became available, and will recheck my figures sometime around June 2024, when I will also take a first crack at estimating 2025 taxes. Unless you have some really crazy streams of income and weird deductions, it's not that hard to do it by hand.

 

[Healthy Lifestyle]

Thanks all, Now in retirement, I am learning to pay more attention to taxes and future income.

 

[audreyh1]

I estimate my taxes every year using nothing more than a pencil and sheet of notebook paper. That way, I know precisely what assumptions are made and I can be sure the calculation is correct. If I am contemplating whether to take certain actions, I might prepare a couple of scenarios, such as with or without Roth conversions. I am usually very accurate in my estimates.

I first estimated 2024 taxes in June 2023, adjusted my figures as necessary in November 2023, as more data became available, and will recheck my figures sometime around June 2024, when I will also take a first crack at estimating 2025 taxes. Unless you have some really crazy streams of income and weird deductions, it's not that hard to do it by hand.

My annual as well as late year income is very unpredictable. It’s all from investments, no pension and not yet drawing SS.

I generally use the prior year safe harbor rule unless I’m very sure I would be way overpaying. In Nov and Dec I review capital gains distributions estimates and that’s the first time I really have a clue. In Dec I make moves to stay within a certain IRMAA range if I can. If taxes are coming in light I can reduce the final Jan 15 estimated tax payment, but lately I have been more aggressive about pulling income forward to get just under a target IRMAA level.

 

[Gumby]

My annual as well as late year income is very unpredictable. It’s all from investments, no pension and not yet drawing SS....

That would be an equally difficult issue whether you use a calculator or do it by hand.

 

[audreyh1]

Pretty much depend on Quicken to track all my income in all its various forms - dividends, interest, tax exempt income, cap gains distributions, realized gains, etc.

Then in Nov/Dec spreadsheets to estimate MAGI and taxes likely owed for the year.

 

[camfused]

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.

I would like to try this lazy person method next year, when I will have a ton of Federal taxes to pay, due to Roth conversions.

Can someone please verify if this works for NC taxes too? Thanks.

 

[camfused]

^^^ Sorry to resurrect this old thread, but can someone please answer my question about NC taxes?

If true, the I assume that I do a 100% withholding distribution for Fed taxes, and another 100% withholding distribution for NC taxes?

Thanks

 

[Jerry1]

^^^ Sorry to resurrect this old thread, but can someone please answer my question about NC taxes?

If true, the I assume that I do a 100% withholding distribution for Fed taxes, and another 100% withholding distribution for NC taxes?

Thanks

I don’t give professional advice over the internet but I think if you read this document from NC, you will find your answer. I believe the document supports that NC handles estimated tax payments the same as the Fed. Follow the logic in the form on page 2.

https://files.nc.gov/ncdor/documents/forms/nc40_instr_16.pdf

 

[RetiredHappy]

It's late and I haven't waded through 7 pages of this thread yet. Our situation with taxes this year was a little strange. TT said that we have a $4 penalty on late payment and yet we are getting a $3K refund. Last year we withdrew RMD every quarter or so and then at the end of the year, had 99% of the last withdrawal withheld for taxes. I think we are hit with the penalty because IRS expected quarterly payment. I had always thought that RMD withholding can simply be done at the last withdrawal. Can any of you confirm that we do indeed have to make quarterly payment as long as we are withdrawing RMD throughout the year? Thanks.

 

[Jerry1]

It's late and I haven't waded through 7 pages of this thread yet. Our situation with taxes this year was a little strange. TT said that we have a $4 penalty on late payment and yet we are getting a $3K refund. Last year we withdrew RMD every quarter or so and then at the end of the year, had 99% of the last withdrawal withheld for taxes. I think we are hit with the penalty because IRS expected quarterly payment. I had always thought that RMD withholding can simply be done at the last withdrawal. Can any of you confirm that we do indeed have to make quarterly payment as long as we are withdrawing RMD throughout the year? Thanks.

Using the withholding method should have worked. Look at your numbers. You must not have satisfied the hold harmless provision. Did you have 100% of last years tax withheld? (Or 110% if your income was high enough?)

 

[Winemaker]

It's late and I haven't waded through 7 pages of this thread yet. Our situation with taxes this year was a little strange. TT said that we have a $4 penalty on late payment and yet we are getting a $3K refund. Last year we withdrew RMD every quarter or so and then at the end of the year, had 99% of the last withdrawal withheld for taxes. I think we are hit with the penalty because IRS expected quarterly payment. I had always thought that RMD withholding can simply be done at the last withdrawal. Can any of you confirm that we do indeed have to make quarterly payment as long as we are withdrawing RMD throughout the year? Thanks.

I used a professional CPA firm to do our taxes for 2023 tax year because we sold our rentals. I paid estimated tax payments in Q1, Q3, and Q4 and was well over 110% of 2022 taxes. The CPA still said a penalty was due because I hadn't made a estimated payment in Q3. We e-filed for the first time ever because the return was over 75 pages two weeks ago, but haven't received our refund yet.

 

[audreyh1]

It's late and I haven't waded through 7 pages of this thread yet. Our situation with taxes this year was a little strange. TT said that we have a $4 penalty on late payment and yet we are getting a $3K refund. Last year we withdrew RMD every quarter or so and then at the end of the year, had 99% of the last withdrawal withheld for taxes. I think we are hit with the penalty because IRS expected quarterly payment. I had always thought that RMD withholding can simply be done at the last withdrawal. Can any of you confirm that we do indeed have to make quarterly payment as long as we are withdrawing RMD throughout the year? Thanks.

Can you walk through the form that determined the penalty? Are you sure that the withholding is entered as withholding and not estimated taxes paid?

Using the withholding method should have worked. Look at your numbers. You must not have satisfied the hold harmless provision. Did you have 100% of last years tax withheld? (Or 110% if your income was high enough?)

Jerry this would not apply because clearly they paid over 90% of 2023 years taxes by year end, the other hold harmless provision.

 

[Jerry1]

I used a professional CPA firm to do our taxes for 2023 tax year because we sold our rentals. I paid estimated tax payments in Q1, Q3, and Q4 and was well over 110% of 2022 taxes. The CPA still said a penalty was due because I hadn't made a estimated payment in Q3. We e-filed for the first time ever because the return was over 75 pages two weeks ago, but haven't received our refund yet.

The problem is that you made quarterly payments. Had you not done that, your withholding would have been much larger (the entire amount needed) and that would have been assumed to have been paid equally throughout the year. By mixing quarterly payments and withholding, you didn’t get enough into the third quarter.

 

[audreyh1]

The problem is that you made quarterly payments. Had you not done that, your withholding would have been much larger (the entire amount needed) and that would have been assumed to have been paid equally throughout the year. By mixing quarterly payments and withholding, you didn’t get enough into the third quarter.

He doesn’t indicate that he used withholding. The problem was that he skipped one of the quarterly estimated tax payments.

 

[cathy63]

It's late and I haven't waded through 7 pages of this thread yet. Our situation with taxes this year was a little strange. TT said that we have a $4 penalty on late payment and yet we are getting a $3K refund. Last year we withdrew RMD every quarter or so and then at the end of the year, had 99% of the last withdrawal withheld for taxes. I think we are hit with the penalty because IRS expected quarterly payment. I had always thought that RMD withholding can simply be done at the last withdrawal. Can any of you confirm that we do indeed have to make quarterly payment as long as we are withdrawing RMD throughout the year? Thanks.

If the only tax payment you have is via withholding, something seems wrong in the way you entered that 1099-R. You didn't fill out form 2210 Schedule AI did you? You definitely don't want to tell the IRS that you paid everything in Q4.

Take a look at your 1040 lines 16 to 33 and make sure all of those numbers are correct and make sense.

If the 1040 looks ok, then I believe there's an option in TurboTax to say that you want to let the IRS figure the penalty and send you a bill. Check that box. The IRS is very unlikely to come after you for a $4 penalty. For my Tax-Aide clients it usually takes about 3 years of significant underpayment before they get a letter.

 

[sengsational]

^^^ Sorry to resurrect this old thread, but can someone please answer my question about NC taxes?

If true, the I assume that I do a 100% withholding distribution for Fed taxes, and another 100% withholding distribution for NC taxes?

Thanks

I pay NC income taxes by specifying that a December tIRA/t401k withdrawal have NC withholding. I've never had to pay a penalty.

 

[Jerry1]

He doesn’t indicate that he used withholding. The problem was that he skipped one of the quarterly estimated tax payments.

Sorry, you’re correct. I combined winemaker and retired happy’s posts as I was answering. My bad - sorry.

 

[Winemaker]

He doesn’t indicate that he used withholding. The problem was that he skipped one of the quarterly estimated tax payments.

I did use withholding. I had a inherited IRA, 99% go to tax. After 2 Roth conversions, I sent in 2 estimated tax payment to cover it, in 2 quarters. I skipped Q3 because I saw no tax liability then. Then we sold the rentals in Q4, incurring a tax liability, which I made a estimated tax payment to make sure I was 110% of 2023. We both receive monthly pensions that also has tax withheld, as well as DW's SS.

 

[Jerry1]

I did use withholding. I had a inherited IRA, 99% go to tax. After 2 Roth conversions, I sent in 2 estimated tax payment to cover it, in 2 quarters. I skipped Q3 because I saw no tax liability then. Then we sold the rentals in Q4, incurring a tax liability, which I made a estimated tax payment to make sure I was 110% of 2023. We both receive monthly pensions that also has tax withheld, as well as DW's SS.

Then my post (#141) would apply. Having "some" withholding doesn't necessarily take care of the need to have sufficient payments spread throughout the year.

 

[Winemaker]

I'm trying to understand. At the end of the 2nd quarter, my estimated taxes paid matched my liabilities. Withholding covered my liabilities in the 3rd quarter. In the 4th quarter, we sold the rentals, incurring a liability, in which I made an estimated payment.

How could I estimate a liability in Q3 when it we had no idea of one?

 

[audreyh1]

I did use withholding. I had a inherited IRA, 99% go to tax. After 2 Roth conversions, I sent in 2 estimated tax payment to cover it, in 2 quarters. I skipped Q3 because I saw no tax liability then. Then we sold the rentals in Q4, incurring a tax liability, which I made a estimated tax payment to make sure I was 110% of 2023. We both receive monthly pensions that also has tax withheld, as well as DW's SS.

OK then what Jerry said goes.

If you didn’t have any YTD tax liability in Q3, you would have had to switch to the Annualized Income method for estimating taxes to make sure that was true YTD to avoid penalty and also file form 2210 at tax time to prove it. Seems like not enough was withheld in total to make up for skipping the estimated tax payment even if later you reached 110% prior year’s taxes.

Did the CPA try using form 2210? He would have had to know the timing of your income received every tax quarter. If the income from the rentals was all in Q4 then he should have filed form 2210, but would need the income you received each tax quarter to do this.

The Annualized Income method takes the YTD income received each tax quarter, annualizes it, then computes the taxes on that amount, then has you paying some pro-rated amount each quarter. It does compare to the 110% prior year each quarter so if you at least pay 1/4 of that each quarter if less than current pro-rated liability you are safe. This AI method can mean you are paying a bit more early to avoid penalty but it evens out. Regardless you never have to pay more than 1/4 of prior year taxes (x110%) each quarter to avoid penalty.

 

[Winemaker]

I hired the CPA in December after we closed on December 1st. The penalty was $66, so I'll chalk it up to an "educational expense". I don't remember seeing a form 2210, there was 75 pages altogether and I'm still going through them. I usually Turbo Tax my returns, but because of the sales, I wanted to make sure everything was right and I didn't overlook something.