How/Where/When to file/pay estimated taxes

[merlin3942]

I've been FIRE'd for about 4 years now, and so far, have been living strictly off of after-tax savings. I now find myself needing to start withdrawing some funds from one of my retirement accounts. The institution where those accounts are held (TIAA) will automatically "withhold" both federal and state income taxes for me ... but it's unclear to me whether I still will need to start doing something about filing/paying "estimated income tax" quarterly? If so, exactly how do I start filing and making those payments? I've been using H&R Block Tax prep software for quite a few years, but I don't recall ever seeing anything in that program that deals with filing estimated taxes? How do others handle this issue? Any particular software recommendations to do e-filing?

 

[youbet]

If TIAA withholds appropriates taxes, you won't need to file estimated taxes. It's your responsibility that the amount TIAA withholds meets the IRS guidelines.

 

[OldShooter]

The super-easy way may work for you: Figure out your "safe harbor" taxes due. This is either your last year tax bill or 110% (IIRC) of the bill, depending on your income. Sometime in December, withdraw that amount from your IRA and specify 100% withholding. If you have state income taxes, verify that this will work and do the same. There is no need to estimate or calculate anything.

If you end up underpaid, you pay the balance with your return. Overpaid, apply to next year or ask to get it back.

The keys to this are (1) the safe harbor amount and (2) that withheld taxes are considered to have been paid over the full year, so no need to worry about paying quarterly, and (3) being able to pay the amount via withholding.

 

[SecondCor521]

It depends on if the withholding by TIAA is enough for you to meet one (or more) of the safe harbor provisions and therefore avoid an underpayment penalty. There are three safe harbor provisions; Old Shooter mentioned one (and a half) of them. Google for the other one if you like, or just read about them in the IRS estimated payment instructions.

If it is, then you don't need to do anything more. You'll get a 1099-R (probably) from TIAA with the amount paid out to you and the federal and state withholding. H&R Block's tax program will accept those entries just fine.

If not, you'll need to start paying quarterly estimated taxes. You can google "estimated federal taxes site:irs.gov" to find out more, but the basics are:

1. You'll figure out how much in total estimated taxes you need to pay, and then pay 1/4 of that amount on the quarterly estimated dates.

2. Note that the quarterly estimated dates are not evenly spaced throughout the year.

3. You then make those payments either the old-fashioned way via paper check in the mail to the IRS with an estimated payment coupon with your name and SSN on it, or you can do it online via ACH via a system called EFTPS. There is no software per se when making estimated tax payments to the federal government.

4. Keep copies of those payments with your tax records.

5. When you go to file your taxes, there will be a place to put in the estimated tax payments in the H&R Block tax program. Type in the numbers from your records. You should see those payments reflected on a line on your tax return (it's towards the bottom of page 2 of Form 1040 near where withholding is listed).

And generally speaking you can have any mixture of withholding and estimated tax payments you like, as long as the total amount paid in meets the safe harbor rules.

 

[RetireBy90]

We have withholding from pensions and SS but doing Roth conversions adds to the bill and then the withholding from 4 small sources each withhold at a very low tax rate. So, first year I did the IRA withdraw and had 100% withheld. About 80% to feds and 20% to state. This year we started making quarterly payments from after tax funds. The December one time payment via withholding was easiest to figure as in year 3 of retirement I'm still trying to get closer to our actual income and thus tax bill. Working off the 110% figure this year with estimated quarterly payments.

Lots of ways to pay this, ETPFS or check or withholding. Find one that works easy for you so you don't spend the year trying to figure if you are doing too much or not enough

 

[Midpack]

Lots of ways to pay this, [-]ETFS[/-] EFTPS or check or withholding. Find one that works easy for you so you don't spend the year trying to figure if you are doing too much or not enough

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

Great system, and many of us here use it to pay our estimated taxes quarterly (or whatever frequency you choose).

 

[GalaxyBoy]

The super-easy way may work for you: Figure out your "safe harbor" taxes due. This is either your last year tax bill or 110% (IIRC) of the bill, depending on your income. Sometime in December, withdraw that amount from your IRA and specify 100% withholding. If you have state income taxes, verify that this will work and do the same. There is no need to estimate or calculate anything.

If you end up underpaid, you pay the balance with your return. Overpaid, apply to next year or ask to get it back.

The keys to this are (1) the safe harbor amount and (2) that withheld taxes are considered to have been paid over the full year, so no need to worry about paying quarterly, and (3) being able to pay the amount via withholding.

This is exactly what I do.

 

[daver]

The super-easy way may work for you: Figure out your "safe harbor" taxes due. This is either your last year tax bill or 110% (IIRC) of the bill, depending on your income. Sometime in December, withdraw that amount from your IRA and specify 100% withholding. If you have state income taxes, verify that this will work and do the same. There is no need to estimate or calculate anything.

If you end up underpaid, you pay the balance with your return. Overpaid, apply to next year or ask to get it back.

The keys to this are (1) the safe harbor amount and (2) that withheld taxes are considered to have been paid over the full year, so no need to worry about paying quarterly, and (3) being able to pay the amount via withholding.

I like this approach, hopefully safe harbor rules work in California?

 

[SecondCor521]

I like this approach, hopefully safe harbor rules work in California?

Safe harbor rules (as discussed in this thread so far anyway) are federal.

States each have their own individual rules about withholding. I don't know about California, because I don't live there. My state doesn't have any withholding requirement, so you can pay your entire state tax bill with your tax return without any issue.

 

[Lawrencewendall]

Maryland hits you with a penalty for underpayment throughout the year. Ask me how I know.

 

[cathy63]

I like this approach, hopefully safe harbor rules work in California?

Yes, California's safe harbor rules (including the withholding loophole) are the same as the Federal safe harbor rules except that they apply if your tax will be over $500 vs $1000 for the Feds.

 

[EastWest Gal]

If you have equities in an after tax account, you will need to consider how your RMD affects your total income. If single and your total income is >$40K, if married, >$80K, your Federal capital gains (and qualified dividends) tax bracket is 15%, instead of 0%. There will also be state income tax as well, on both the RMD and capital gains and dividends. I don't know your situation, but in PA, all cap gains and dividends are taxed the same as regular income. My state does not tax RMDs or pensions. Your state is probably different.

Another thing-if you go the quarterly tax route, the quarters are not even. Payments are due 4/15, 6/15, 9/15 and 1/15 of the next year.

 

[daver]

Yes, California's safe harbor rules (including the withholding loophole) are the same as the Federal safe harbor rules except that they apply if your tax will be over $500 vs $1000 for the Feds.

Thanks, So the loophole reference meaning the one time "December" withheld taxes are considered to have been paid over the full year...Right?

 

[cathy63]

Thanks, So the loophole reference meaning the one time "December" withheld taxes are considered to have been paid over the full year...Right?

Yes.

 

[Cobra9777]

I did quarterlies for years after I first retired. But since turning 59.5, I now use the method described by OldShooter, with one added twist... I use taxable funds to pay back the tIRA withdrawal within 60 days. So it becomes a non-taxable rollover. But of course the withholding stays as-is.

Reason for the added twist: most of our tax liability is driven by large Roth conversions. This enables me to use taxable funds to pay the conversion tax, which has some well-documented advantages vs using tax-deferred funds.

The overall approach is very cashflow friendly, simple to transact, avoids tax/penalties, avoids quarterly payments, avoids Form 2210 to prove you had uneven income, etc.

By late Dec, I know my tax liability to within a couple hundred dollars. So I use the 90% safe harbor rule... I pay 90% of current year liability and the rest when I file the return.

 

[Badger]

Since I started with RMDs I started filing quarterly. I don't have any taxes taken out from any SS, pension, dividends, or RMD. That way I know the total income from the previous year tax and plan for the following year with how much I need to send in each quarter. If additional tax is due (if anything like dividends or RMD is more than the year before) then the difference can be sent in with the last quarter payment. The forms can be obtained from the IRS website with the appropriate tear off for each quarter and the month they are due. There may be a better way but this works for me.


Cheers!

 

[CardsFan]

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

Great system, and many of us here use it to pay our estimated taxes quarterly (or whatever frequency you choose).

Another vote for EFTPS. I calculate my safe harbor number after doing taxes in March, and then schedule the payments for the rest of the year on-line. MO has an on line pay system, but you can't schedule the entire year, so I just send them 4 checks. I put the dates on my calendar for the state, and that is also a reminder to make sure the checking account has enough to pay the Feds when they pull it

FWIW, MO also follows the Fed safe harbor provisions.

I have used the method described by OldShooter, and it works fine, as well.

 

[merlin3942]

Thanks to everyone for your knowledgeable responses. Sounds like the strategy suggested by Old Shooter should work well for me.