High CD rates = Estimated taxes!

[audreyh1]

Agree. 100%. . Been doing this for years. Then a poster mentioned, if
you are taking RMD's, (required minimum distribution, IRA's).

Easier, to just "Withhold" a portion of the RMD. No more mailing in estimated payments. Been doing this now for the last few years.

So much easier. (still using your idea, pay prior years tax).

Yes, if you have opportunities to withhold there are more options. I don’t have any withholding opportunities yet.

And I schedule all estimated payments at once via EFTPS the same time I schedule any final payment owed for the prior year taxes, so it’s been pretty straightforward for me. And no mailing involved.

 

[JARON46]

I run a spreadsheet to estimate my taxes. I log on to EFTPS monthly and make one payment for the month.

If my tax estimate increases or decreases during the year I can change my monthly payment the next time I make a payment at EFTPS.

I am going to start making estimated tax payments for state taxes due to higher interest rates that are state taxable.

 

[Phroig]

Single filers also at 150k or higher.

I believe it’s $75K for married filing separately.

 

[Midpack]

We’ll have way more savings and T-Bill interest this year too. I’ve used a spreadsheet I developed in 2011, updated as needed, to pay estimated Fed and state taxes every quarter. It’s not that hard and it accounts for interest (incl tax exempt, qualified and govt obligations), Roth conversions, dividends, CG’s, foreign tax credits, etc. so I get as close as I want to a refund or amount due. Keeps me within IRMAA threshold and marginal brackets too. I assumed we all did something to estimate taxes…

 

[audreyh1]

I also developed a spreadsheet way back when and kept it up to date. It basically mimics the forms available in the IRS publication that covers annualized income estimated taxes. Because most of my income is received in Dec the AI method favors paying less tax early, and is particularly important following an unusually high taxable income year. However it is also a lot of work/hassle.

It turns out that I have been able to get away with the prior year taxes safe harbor method for a few years now which I like as it is nicely mindless (and can be scheduled all at once with EFTPS). So I’ve devolved to my “lazy AI” method where I pay the first 3 quarters equally based on safe harbor and then I do a whole year tax estimate in December to see where I stand. I modify my 4th estimated tax installment to get closer to the 90% of current year taxes owed or continue with the safe harbor whichever is less.

2022 was the first year where I ended up overpaying just with the first 3 quarters. Big taxable income drop due to much lower distributions. I actually increased my taxable income in Dec by harvesting some capital gains bringing forward future taxable income as I switched out some funds. Still had a small overpayment that will be applied to 2023 estimated taxes.

 

[Freedom56]

Underpayment penalties may not have been that much of an issue when rates were at zero and the amount of underpayment was relatively low. However if you have unusually large gains in 2023 or much higher interest payments, the penalties can be significant. In our case we had a significant long term capital gain in excess of $560K in Q1 of 2023 due to the sale of a property. In addition, there will be monthly interest receipts from CDs and Bonds in taxable accounts that will be far in excess of safe harbor rules.

What Are the Underpayment Penalties for 2023?

For the first quarter (Q1) of 2023, the IRS underpayment penalties are 7% for most underpayments and 9% for large corporate underpayments.

Underpayment penalties are the federal short-term rate plus 3 percentage points.
Therefore, with rising rates, the underpayment penalties will be higher each quarter of 2023.

What Are IRS ‘Safe Harbor’ Rules?

“Safe harbor” rules allow you to not pay a penalty or to pay a reduced penalty if you meet certain conditions. An underpayment penalty with the IRS can be avoided if you meet conditions like owing less than $1,000 or paying more than 90% of your tax obligation for the year.

https://www.investopedia.com/terms/u/underpaymentpenalty.asp

You don't have to send checks and forms every quarter. You can set up an account with the IRS and state agencies and send e-payments prior to each quarterly deadline. In our case we have already sent the estimated capital gains tax to the Federal and state agencies as the IRS was issued a 1099-S with the gross proceeds of the sale at the time of the closing. We know what our taxable interest payments will be in 2023 from bonds, treasuries, and CDs, so we plan to send quarterly e-payments throughout 2023.

 

[Dtail]

I believe it’s $75K for married filing separately.

Correct but in this rule, the single taxpayer is treated like a MFJ vs. typically the same as an MFS.