Equal Estimated Tax Payments

[RunningBum]

So for us retired folks that just have SS and tIRA/401k withdrawals/RDM's, can't we just make one big withdrawal in December and pay it all then w/o penalty?


I've been doing that and no penalty.

If you did withholding from that December withdrawal, that's all you need to do.

If you pay the estimated tax some other way, you will have to fill out form 2210 to match up income with tax payments, and that may or may not result in penalty.

 

[RunningBum]

Just to be clear: there is no requirement to make equal estimated tax payments and no penalty for not doing so.

Instead, each quarter has its own calculation with individual safe harbors as mentioned.

I think even IRS statements on this are needlessly confusing.

As retirees with variable income sources and timing, we all should be aware of these calculations.

Yes, and to be even more clear you may have to fill out form 2210 to avoid penalty.

 

[Sojourner]

I filled out 2210 using Turbo Tax and there was no penalty. Not sure why people say it’s hard to fill out. I thought it was pretty straightforward - at least it was with using Turbo Tax.

I've been filling out Form 2210 (including Schedule AI) for years now, and I definitely don't consider it straightforward . I use H&R Block, but I can't see how TT could make it so much easier considering that tax programs don't know the exact timing of the dividends, capital gains distributions, interest income, and other sources of income one receives unevenly throughout the year until you input all that data. And IME brokerages don't provide that tax-quarterly breakdown, either. You have to download all the data and manipulate it yourself to get the "income by tax period" data required for Form 2210 Schedule AI. I suppose it can be fairly straightforward if the vast majority of one's income is spread evenly throughout the year and there's just one uneven income event that happens in Q4... but that isn't my situation at all. My income has always varied a lot throughout the year due to cap gains, dividends, and "options premiums" income. It has long been a pet peeve of mine that brokerages only provide a breakdown of investment income along calendar quarter lines and not "IRS tax quarter" lines.

 

[RetireBy90]

Based on some postings here, the last 2 years I took TIRA draw with 99% withholding in Dec to plus up my quarterly payments to slightly over my expected tax due. It has allowed me to pay at the point I have the best estimate of tax due. It works well for our situation and each person or couple is unique somehow.

 

[Montecfo]

I've been filling out Form 2210 (including Schedule AI) for years now, and I definitely don't consider it straightforward . I use H&R Block, but I can't see how TT could make it so much easier considering that tax programs don't know the exact timing of the dividends, capital gains distributions, interest income, and other sources of income one receives unevenly throughout the year until you input all that data. And IME brokerages don't provide that tax-quarterly breakdown, either. You have to download all the data and manipulate it yourself to get the "income by tax period" data required for Form 2210 Schedule AI. I suppose it can be fairly straightforward if the vast majority of one's income is spread evenly throughout the year and there's just one uneven income event that happens in Q4... but that isn't my situation at all. My income has always varied a lot throughout the year due to cap gains, dividends, and "options premiums" income. It has long been a pet peeve of mine that brokerages only provide a breakdown of investment income along calendar quarter lines and not "IRS tax quarter" lines.

There are some shortcuts, in my opinion.

So start out assuming all your income was even throughout the year. Then move the the appropriate quarter any material income you know was not.

Such as any meaningful cap gains, one or two time IRA withdrawals, income which stopped or started during the year, etc.

It is an estimate. I only take the time accounting for anything if it is very lumpy.

 

[audreyh1]

I've been filling out Form 2210 (including Schedule AI) for years now, and I definitely don't consider it straightforward . I use H&R Block, but I can't see how TT could make it so much easier considering that tax programs don't know the exact timing of the dividends, capital gains distributions, interest income, and other sources of income one receives unevenly throughout the year until you input all that data. And IME brokerages don't provide that tax-quarterly breakdown, either. You have to download all the data and manipulate it yourself to get the "income by tax period" data required for Form 2210 Schedule AI. I suppose it can be fairly straightforward if the vast majority of one's income is spread evenly throughout the year and there's just one uneven income event that happens in Q4... but that isn't my situation at all. My income has always varied a lot throughout the year due to cap gains, dividends, and "options premiums" income. It has long been a pet peeve of mine that brokerages only provide a breakdown of investment income along calendar quarter lines and not "IRS tax quarter" lines.

+1

All my income is from investments in taxable accounts and thus varies wildly from year to year as well as being highly lumpy. Plus there is the occasional rebalancing. And occasionally a large charitable donation.

 

[Sunset]

I've been filling out Form 2210 (including Schedule AI) for years now, and I definitely don't consider it straightforward . I use H&R Block, but I can't see how TT could make it so much easier considering that tax programs don't know the exact timing of the dividends, capital gains distributions, interest income, and other sources of income one receives unevenly throughout the year until you input all that data. And IME brokerages don't provide that tax-quarterly breakdown, either. You have to download all the data and manipulate it yourself to get the "income by tax period" data required for Form 2210 Schedule AI. I suppose it can be fairly straightforward if the vast majority of one's income is spread evenly throughout the year and there's just one uneven income event that happens in Q4... but that isn't my situation at all. My income has always varied a lot throughout the year due to cap gains, dividends, and "options premiums" income. It has long been a pet peeve of mine that brokerages only provide a breakdown of investment income along calendar quarter lines and not "IRS tax quarter" lines.

Our income can vary a lot year over year.

I just pay 110% of the previous year tax in 4 equal payments.
It's a LOT easier, no hard calculations, no tracking.

I might be loaning the Gov't some $$ for free some years, but guaranteed I don't get penalties, and saves me some hours.

 

[Sojourner]

Our income can vary a lot year over year.

I just pay 110% of the previous year tax in 4 equal payments.
It's a LOT easier, no hard calculations, no tracking.

I might be loaning the Gov't some $$ for free some years, but guaranteed I don't get penalties, and saves me some hours.

This is exactly what I plan on doing as soon as I stop receiving some very lumpy capital gains distributions from one particular source. In my case, paying 110% would sometimes have involved "loaning the gov't a LOT of free $$" in certain years, so I've avoiding doing that. Starting next year, though, I should be able to go the much easier 110% route with far less (almost zero) downside to me.

 

[I Yam What I Yam]

I think this is as simple as - your tax preparer screwed up. They should file an amended return for you without any cost to you.

I agree. Hoping to have a discussion with the preparer in the next few days.

 

[jebmke]

That’s exactly what I do. But I don’t consider your scenario a failure. It’s a trade-off against using the Annualized Income method which is a lot more time consuming.

In 2022 I ended up overpaying with just the 3 payments because my investment income dropped much more than expected. So I cancelled the 4th payment.

I should point out that my income all from investments is very unpredictable. I really don’t know until Dec where I stand. Then I’m furiously estimating income and taxes for the year, checking MAGI against projected IRMAA thresholds two years out, and deciding if I want to take any additional steps that will impact current year income versus future income.

Mine is fairly predictable inasmuch as we don't trade and none of our investments distribute gains. My failure is really the fact that had I been a bit more on the ball and looked into the donation play in late summer, I could have skipped the September payment and not ended up with a refund for 2022. I hate refunds.

 

[I Yam What I Yam]

Thought I would give an update. Got a message from the tax preparer last night and they did complete the 2210 and 2210AI. However, it is their practice to not complete these so the timing of the income. They re-worked the forms and took the timing of the income into account resulting in a significantly smaller penalty. They did this with no additional charge and will file an amended return with no additional charge (as it should be).

Seems to me they know they dropped the ball. Thinking next year we will be using TurboTax.

 

[FedRetired50]

... significantly smaller penalty...

I assume there was still a penalty due to an underpayment?

 

[audreyh1]

I assume there was still a penalty due to an underpayment?

There must have been an underpayment for one or more of the quarters.

 

[I Yam What I Yam]

I assume there was still a penalty due to an underpayment?

Yes. Had a small underpayment in one quarter due to some unexpected income.

 

[audreyh1]

Another moral of the story, if you’ll forgive me, besides not using a tax preparer that won’t normally deal with the full Form 2210 AI and uneven income, is that if you don’t wish to use prior year’s taxes safe harbor method for fear of overpaying estimated taxes, you had better do the annualized income method to compute estimated taxes. If you want to avoid a penalty that is. Not everyone cares about paying a penalty.

 

[I Yam What I Yam]

Another moral of the story, if you’ll forgive me, besides not using a tax preparer that won’t normally deal with the full Form 2210 AI and uneven income, is that if you don’t wish to use prior year’s taxes safe harbor method for fear of overpaying estimated taxes, you had better do the annualized income method to compute estimated taxes. If you want to avoid a penalty that is. Not everyone cares about paying a penalty.

That definitely was a learning for us from this experience. .

 

[tutan]

So for us retired folks that just have SS and tIRA/401k withdrawals/RDM's, can't we just make one big withdrawal in December and pay it all then w/o penalty?

Many people do exactly that.

And us retired folks who don’t have pension, SS, RMD or anything to withhold from still have to pay exclusively by estimated tax payments.

Yes, withdrawals from things like paychecks, SS, IRA/401ks are considered to be over the course of the year, even if all done at the end of the year.

Please bear with me. So have the IRA custodian withold tax one time say only at the end of the year is one way to avoid paying 4 times during the year? Just want to avoid extra work but then again probably isn't that much hassle when you get used to doing it four times a year. Thanks.

 

[Marc]

Thank you for all the information in this thread. I just changed my estimated payments for this year adding additional $250 per quarter to cross the 110% of last year's taxes paid. I did this even though we will be starting wife's social security this year which will also have taxes withheld. I think going forward I will just ensure 110% in my estimated payments so that I never have to worry about any penalty or even filing 2210.

Again, many thanks,

Marc

 

[audreyh1]

Thank you for all the information in this thread. I just changed my estimated payments for this year adding additional $250 per quarter to cross the 110% of last year's taxes paid. I did this even though we will be starting wife's social security this year which will also have taxes withheld. I think going forward I will just ensure 110% in my estimated payments so that I never have to worry about any penalty or even filing 2210.

Again, many thanks,

Marc

If you run into a situation where you think you might have overpaid, review your situation in December. You can adjust the 4th estimated tax payment due 1/15 such that you pay 90% of the current year taxes due and still not owe penalty or have to fill out Form 2210 Schedule AI. This is assuming that by the end of December you have a good handle on your tax liability. Otherwise stick to the 110%/4 plan as it is simpler.

 

[Montecfo]

Thank you for all the information in this thread. I just changed my estimated payments for this year adding additional $250 per quarter to cross the 110% of last year's taxes paid. I did this even though we will be starting wife's social security this year which will also have taxes withheld. I think going forward I will just ensure 110% in my estimated payments so that I never have to worry about any penalty or even filing 2210.

Again, many thanks,

Marc

If possible, I would get 100 pct of withholding out of SS. Easier than ES payments and more forgiving.

Just a thought.

 

[Marc]

If possible, I would get 100 pct of withholding out of SS. Easier than ES payments and more forgiving.

Just a thought.

Maybe when I turn 70 and take my SS; currently wife will get around $18,000 gross and our tax bill will be around $32,000.

 

[xlf11]

If possible, I would get 100 pct of withholding out of SS. Easier than ES payments and more forgiving.

Just a thought.

You can only withhold max of 22% IRS tax (no state tax) out of SS and it can only be done through phone initially or by paper form later (no easy website change like DD).

 

[Montecfo]

You can only withhold max of 22% IRS tax (no state tax) out of SS and it can only be done through phone initially or by paper form later (no easy website change like DD).

Is that right? A very curious rule.

Can anyone name one other instance where IRS limits your ability to deposit taxes?

 

[braumeister]

Is that right? A very curious rule.

Can anyone name one other instance where IRS limits your ability to deposit taxes?

It's not IRS, it's SS that made this rule.
The only withholding amounts possible from your SS benefit are 7, 10, 12, or 22% of your monthly benefit. I have never found an explanation of this strange rule.

 

[Montecfo]

It's not IRS, it's SS that made this rule.

The only withholding amounts possible from your SS benefit are 7, 10, 12, or 22% of your monthly benefit. I have never found an explanation of this strange rule.

It is "the government".

Still not aware of any similar rule.