Tax penalty question

[Stwicky]

My 2022 income tax was about $13,000. As such, for 2023 I made estimated tax payments totaling ~$13000. However, I did some larger Roth conversions this year and I estimate my 2023 tax bill to be something like $23000. Will I face penalties for underpayment? Should I go ahead and make a larger tax payment before the end of the year? Any benefit in doing so?

 

[boilerman]

It depends on when you made the Roth conversions. Taxes are owed when the income occurs. You should have made additional estimated tax payments in the same quarter the Roth conversions were done.

The penalties for underpayments are calculated by determining the number of days the taxes are late. The sooner you make the tax payment, the less the penalty.

 

[SevenUp]

Depends on the timing and amounts of the estimated payments, and possibly the timing and amounts of the Roth conversions.

See the Safe harbors section in the Bogleheads wiki - does that clarify things for you?

 

[Out-to-Lunch]

You may want to consider the strategy outlined in this thread: https://www.early-retirement.org/forums/f28/paying-taxes-in-retirement-with-tax-withholding-distributions-120051.html

Basically, if you withdraw from an IRA or a 401(k)/403(b), and designate most of it to be withheld for taxes, this can solve your underpayment problem.

 

[audreyh1]

My 2022 income tax was about $13,000. As such, for 2023 I made estimated tax payments totaling ~$13000. However, I did some larger Roth conversions this year and I estimate my 2023 tax bill to be something like $23000. Will I face penalties for underpayment? Should I go ahead and make a larger tax payment before the end of the year? Any benefit in doing so?

No because you paid estimated taxes that matched your prior year taxes. I’m assuming your prior year AGI was under $150K MFJ. I don’t know what it is for single filer - it’s $75K. If it’s above then you are supposed to pay at least 110% of prior year taxes in estimated payments.

I wouldn’t pay more than 110% of prior year taxes and you have until 1/15/24.

 

[DrRoy]

No because you paid estimated taxes that matched your prior year taxes. I’m assuming your prior year AGI was under $150K MFJ. I don’t know what it is for single filer - it’s $75K. If it’s above then you are supposed to pay at least 110% of prior year taxes in estimated payments.

I wouldn’t pay more than 110% of prior year taxes and you have until 1/15/24.

+1