FreeTaxUSA predicts I'll owe more than expected. How do I pay in advance to avoid penalty?

[Amethyst]

Throughout 2024, as always, I've had OPM take monthly withdrawals out of my Federal pension to cover pension
and investment income.

I always have OPM send the IRS a bit more than I owed the previous year. Not 10%, though.
Until now, the monthly w/d always covered my tax bill and a bit more; I got a modest refund.

This year, it looks like I will owe about 15% more than 2023, considering the predicted year-end distributions and the special investment tax.
Naturally this number will adjust once the real year-end figures are out, but my sense is that the adjustment is likely to be up, not down.

Anyway, I want to send the IRS the predicted extra payment. I'd prefer to send an e-check from my bank's billpay service, or just stick a paper check in an envelope with a stamp.

The trouble is, I've been all over IRS.gov, and can't seem to find instructions and a mailing address for an extra payment that isn't a quarterly estimated tax payment, nor a payment on last year's return.

Considering the state of the Treasury, you'd think they'd make it super-easy to send donations!

If anyone else has been in this position, please let me know your recommendation. I'm in Florida, if that matters.
I'm trying to avoid having to make an appointment and 100-mile round trip to the nearest IRS office for such
a simple matter.

Thanks,
Amethyst

 

[Jerry1]

Look up safe harbor rules. All you have to do to avoid a penalty is make sure you paid in an amount equal to last years taxes. You need 110% if last years income was over $150K.

Meeting safe harbor will avoid any penalty and then you just send in you payment with the 2024 tax return.

If you need to pay in money, you just make a quarterly payment. You have until Jan 15th to make the last payment. It won’t make any difference if you pay it in sooner than Jan 15th. I know you don’t think it’s a quarterly payment, but it is. The form is generic and you could, for example, make two quarterly payments. So, if you actually need to make a payment, just use the quarterly payment form (1040-ES). It will get properly credited to your account.

 

[Doribe]

My plan is to withdraw cash from my Fidelity brokerage and have them pay out a portion to the IRS before year end, if needed. I haven't had to do this yet, but it is my plan.

I generally adjust my withholding in October using a W-4. I just put the amount I want taken out instead of information for them to make calculations.

I try to have a small payment, so I know when they cash the check.

 

[Amethyst]

Jerry,

This sounds like what I should do. Do I need to include a note to say that this will be my only "quarterly" payment for 2024? Don't want them fussing over not having received the "other three."

Look up safe harbor rules. All you have to do to avoid a penalty is make sure you paid in an amount equal to last years taxes. You need 110% if last years income was over $150K.

Meeting safe harbor will avoid any penalty and then you just send in you payment with the 2024 tax return.

If you need to pay in money, you just make a quarterly payment. You have until Jan 15th to make the last payment. It won’t make any difference if you pay it in sooner than Jan 15th. I know you don’t think it’s a quarterly payment, but it is. The form is generic and you could, for example, make two quarterly payments. So, if you actually need to make a payment, just use the quarterly payment form (1040-ES). It will get properly credited to your account.

 

[cathy63]

This is an estimated payment for your 2024 taxes. You can send in multiple payments each quarter. The best way to do it is electronically, but if you don't want to, you can always send a check with Form 1040-ES. The mailing address should be in the instructions.

 

[cathy63]

Jerry,

This sounds like what I should do. Do I need to include a note to say that this will be my only "quarterly" payment for 2024? Don't want them fussing over not having received the "other three."

No notes are needed.

Do be aware that sending a payment now will not avoid a penalty, though the sooner you pay, the less the penalty will be. If most of your income comes in the fourth quarter, you can submit Form 2210 Schedule AI with your return to minimize it further.

 

[MarieIG]

Athena, Are you in a position to have taxes withheld on an IRA distribution (and then do a 60 day rollover from taxable funds)? I did this last week for tax "smoothing" purposes.

 

[Gumby]

Or, before Dec. 31, you could take a withdrawal from your tIRA sufficient to cover the taxes owed and have your trustee (Vanguard, Fidelity, etc.) withhold it all for taxes. That is considered to have been withheld evenly throughout the year. Just remember to gross up the withdrawal for the taxes that will be due on it.

 

[camfused]

^^^ This is what I personally would do, for the reasons listed

 

[Beststash]

I know this is not your preference but I used IRS Direct Pay for the same situation yesterday - very easy.

 

[MC Rider]

If you have to pay, the times I paid a penalty for not paying enough estimated tax, the penalty was small. Ymmv.

 

[Amethyst]

I'm a little confused by the introduction of IRA withdrawals and not sure what people are talking about. Wouldn't that just mean more taxes?

 

[Gumby]

I'm a little confused by the introduction of IRA withdrawals and not sure what people are talking about. Wouldn't that just mean more taxes?

It is a way to avoid penalties for under-withholding or not paying sufficient quarterly estimated taxes. And, yes, it is a taxable event in and of itself, but, for most people, you need to get money out of your tIRA before RMDs kick in anyway, and avoiding an underpayment penalty improves the return on making that withdrawal now.

 

[Ian S]

The safe harbor approach is the most straightforward way to avoid a penalty and/or tricky calculations. If your taxes owed put you beyond the "safe harbor" then withdrawing from a tIRA and having the entire amount withheld as taxes to get you into the safe harbor will work. It will be as if the entire amount was withheld over the whole year.

 

[Car-Guy]

Or, before Dec. 31, you could take a withdrawal from your tIRA sufficient to cover the taxes owed and have your trustee (Vanguard, Fidelity, etc.) withhold it all for taxes. That is considered to have been withheld evenly throughout the year. Just remember to gross up the withdrawal for the taxes that will be due on it.

I've been doing this for years. I usually make a final "true up" withdrawal a few days before the end of the year, once I'm 99% sure of my taxes for the year. Looks like I'm going to make a final 5k withdrawal from my tIRA this year and w/h 100%. Works for me.

 

[Al18]

The advantage of an IRA withdrawal from a brokerage is the brokerage is it’s quick and IRA withdrawals are said to take place throughout the year, for tax purposes. For example, let’s say you need $1500 more Federal tax and $100 State tax withheld. You call up your brokerage on 12/15 and ask to withdraw $2000 from your IRA, with 75% ($1500) being withheld for Federal taxes and 5% ($100) being withheld for State taxes. They will transfer the remaining 20% ($400) to your non-IRA settlement account. You’ll get a 1099-R from the brokerage in January, showing these amounts - which you enter into your tax program.

 

[Amethyst]

Or, before Dec. 31, you could take a withdrawal from your tIRA sufficient to cover the taxes owed and have your trustee (Vanguard, Fidelity, etc.) withhold it all for taxes. That is considered to have been withheld evenly throughout the year. Just remember to gross up the withdrawal for the taxes that will be due on it.

What does "gross up the withdrawal" mean?

 

[Jerry1]

I'm a little confused by the introduction of IRA withdrawals and not sure what people are talking about. Wouldn't that just mean more taxes?

This is what you do. (summarizing what some others have said)

Let's say last year's tax was $10,000. Assuming you were over $150,000, you need a safe harbor amount of $11,000. You said you pay in extra but not the full 10% extra. Let's assume you'll have $10,500 paid in by the end of the year. You need $500 more to meet safe harbor. Paying it in through estimated payments will not avoid penalty because you're paying it in late. Solution:

Make a withdrawal from your IRA and have the amount 100% withheld. Then, wait a week and transfer that same amount back into your IRA from your after tax/brokerage account. On paper, what you've done is taken a distribution and then put the money back in so there is not tax impact. What you've accomplished is you got $500 withheld and sent to the IRS. That $500 will be considered withholding and considered to have been paid throughout the year which will overcome the problem you'd have if you just send in a check.

It's way easier than you think. I'm sure your IRA administrator will know exactly how to do this. It works like a charm.

 

[Jerry1]

What does "gross up the withdrawal" mean?

Let's say you need $1000 and you're in the 22% bracket. Grossing up means that you take out $1000 divided by 1 - your tax rate (for the 22% bracket, that will be .78) $1,282. So you take out $1,282 and your income goes up by $1,282 and your taxes go up by ($1,282 x .22) which is $282. That's grossing up. But, if you follow my method and pay back the money before the year ends, there's no tax impact and there's no need to gross up anything.

 

[Dranoel]

Let's say you need $1000 and you're in the 22% bracket. Grossing up means that you take out $1000 divided by 1 - your tax rate (for the 22% bracket, that will be .78) $1,282. So you take out $1,282 and your income goes up by $1,282 and your taxes go up by ($1,282 x .22) which is $282. That's grossing up. But, if you follow my method and pay back the money before the year ends, there's no tax impact and there's no need to gross up anything.

Don't you need earned income to make an IRA contribution?

 

[audreyh1]

Don't you need earned income to make an IRA contribution?

You have 60 days to put back an IRA withdrawal.

So you take a withdrawal, but make it 100% tax withheld. Then return the money from your taxable funds.

You have the withheld taxes which are not subject to timing like estimated taxes are.

Yet you don’t have additional taxable income for the year.

You need to characterize the return of funds as a rollover. It’s not a contribution.

Caveats: You can only do this once in a 12 month period; And if you are subject to RMDs you can only rollover the amount that exceeds your RMD for the current year.

The rollover rules give you 60 days from the date of the distribution to get that money into the new account. But they also allow you to redeposit the money back into the existing IRA, acknowledging the fact that IRA accountholders will sometimes change their minds about a provider switch.

As a result, if you can fit within the 60-day rollover window, you can simply redeposit the full amount of the distribution back into your IRA. You'll be treated as if you had never taken the money out, and you won't owe taxes on the funds. You will have to report the transaction on your tax return, but you won't report any taxable income as a consequence.

Can an IRA Distribution Be Put Back? | The Motley Fool

You can sometimes get a do-over on an IRA distribution, but you have to follow the rules. Here's how.

www.fool.com

This is perhaps a lot of trouble, but will avoid tax underpayment penalties if needed late in the year. Just don’t wait until the last minute. Brokerages need time to process this stuff. Some of them even give deadlines.

You can avoid this situation in the first place by learning about and meeting the safe harbor rules which let you avoid late tax payment penalties. It’s good to figure this out before 4/15 of each year.

 

[workmyfingerstothebone]

This is what you do. (summarizing what some others have said)

Let's say last year's tax was $10,000. Assuming you were over $150,000, you need a safe harbor amount of $11,000. You said you pay in extra but not the full 10% extra. Let's assume you'll have $10,500 paid in by the end of the year. You need $500 more to meet safe harbor. Paying it in through estimated payments will not avoid penalty because you're paying it in late. Solution:

Make a withdrawal from your IRA and have the amount 100% withheld. Then, wait a week and transfer that same amount back into your IRA from your after tax/brokerage account. On paper, what you've done is taken a distribution and then put the money back in so there is not tax impact. What you've accomplished is you got $500 withheld and sent to the IRS. That $500 will be considered withholding and considered to have been paid throughout the year which will overcome the problem you'd have if you just send in a check.

It's way easier than you think. I'm sure your IRA administrator will know exactly how to do this. It works like a charm.

This sounds very interesting. I like the idea.
Just started having to pay estimated taxes this year and plan to send 2 estimated tax payments.
Your way sounds better.

Dang , I like this site.

 

[Jerry1]

This sounds very interesting. I like the idea.
Just started having to pay estimated taxes this year and plan to send 2 estimated tax payments.
Your way sounds better.

Dang , I like this site.

It’s not “my way”. I learned it here also. It is a great site.

The main thing I’ve come to appreciate is the benefit of knowing safe harbor rules. That allows me to ensure, without a doubt, that I have enough paid in so that I never pay a penalty. Sure, I may get a large refund or have a large amount due but I’m fine with that. Refunds are rolled forward and I suck it up if I have a large payment due. Thankfully, my income now is pretty stable so it’s really not an issue.

Using the roll over rules is a great hack when, like the OP, something goes wrong. And, as others have pointed out, just doing a withdrawal from your IRA and having it 100% withheld will get you out of trouble just as well. If I was withdrawing from my IRA normally, I’d probably just forgo putting the money back into the IRA.

 

[Car-Guy]

And, as others have pointed out, just doing a withdrawal from your IRA and having it 100% withheld will get you out of trouble just as well.

+1
What I do is whenever I have a "income taxable event" during the year, e.g. RMD tIRA or 401k, withdrawal or a W2G , I just have them withhold 20%. That gets me pretty close. Then the last week of the year, I'll figure my taxes and withdraw just enough from my tIRA @ 100% w/h, to cover whatever tax shortfall I might have. This year, it's about 5k.

Oh, and the very first thing I do when I finish my tax return on TT is to throw away the quarterly tax vouchers it prints out. Never use them.

 

[Sunset]

I once tried to be really clever and pay my taxes that should be required, but was off due to a fund declaring a surprise amount (I didn't get the actual money, so extra annoying). I had to pay penalties.

Since then my plan is to safe harbor by paying 110% of last year's taxes, often means a refund, but no penalties.