Tax question regarding estimated taxes

[FlaMariner]

My basic question is, how can I avoid paying estimated taxes?

I've never paid quarterly estimated taxes.

At the end of the year (as in right after Christmas), I have $$$ withdrawn from my IRA and they are sent to Uncle Sam.

No penalties. No quarterly hassles. And I have a good estimate of how much Uncle Sam is extorting for the year so it works out about right.

I'm still paying "estimated taxes" via/withholding but only at the last minute, one time, no penalty and with a good chance of being close to the right amount.

 

[CardsFan]

I just don't understand the resistance of many to pay estimated taxes quarterly, using the safe harbor amount (100% or 110% of previous years taxes), particularly if your reported income is fairly constant (say +/-$25k of previous year.

I do my taxes in March, figure the safe harbor amount for the next year, set it up once in EFTPS, and then don't need to think about for a year. You get an email in advance of each payment withdrawal, so you can check if you have enough in the account it is drawn on. The email is also a reminder for me to pay the state, as I can't set up multiple payments there.

 

[Jerry1]

Nope- I was off by about $1200. I had not enough paid.

So, not that it changes things but you got the penalty because you didn’t implement safe harbor correctly. There’s no guessing or estimating, paid in needs to equal the prior year number.

So if you understand how withholding is treated, you can skip paying in any estimated taxes. Let’s say last years tax is $10K. At the end of the year, you can take a withdrawal from your IRA and have 100% of it withheld and never incur another penalty. However, it’s easy enough to do the estimated taxes given that you know the exact amount once you file the prior years taxes.

 

[ShokWaveRider]

I just don't understand the resistance of many to pay estimated taxes quarterly, using the safe harbor amount (100% or 110% of previous years taxes), particularly if your reported income is fairly constant (say +/-$25k of previous year.

$25k x 5.5% = ~$1,300 lost interest! I would rather have the ~$1,300 in my pocket. Ours is a little more than the $1,300 is an "about" and "rough" number without a lot of number crunching. Our CDs and MYGAs are paying an average of $5.5% currently. Not for long though .

 

[joesxm3]

Just to be sure.

If I am in the 100% last year tax safe harbor group and pay 25% of that amount every quarter I am ok, right?

 

[Jerry1]

Just to be sure.

If I am in the 100% last year tax safe harbor group and pay 25% of that amount every quarter I am ok, right?

Yes, that’s the essence of safe harbor. Just make sure if you go over $150K in income to up the amount to 110%.

 

[Jerry1]

What I personally do is have some withholding from my pension. The around November when I’m sure how much will be withheld (I could do it sooner but don’t), I have a withdrawal from my IRA and have that 100% withheld for the amount I need to meet safe harbor. Thankfully, the safe harbor rules for my state are exactly the same as Federal.

This will be my first year doing this with Fidelity. I’m not sure if they will allow 100% withholding but I’ll max out what ever they allow and meet safe harbor. So if they only allow 95% to be withheld, I’ll do that and take a small (5%) distribution.

 

[CardsFan]

$25k x 5.5% = ~$1,300 lost interest! I would rather have the ~$1,300 in my pocket. Ours is a little more than the $1,300 is an "about" and "rough" number without a lot of number crunching. Our CDs and MYGAs are paying an average of $5.5% currently. Not for long though .

I was talking about the income being +/-$25k, not the taxes, so maybe $5k, spread out over the year, so maybe $200 in interest lost in a -$25k year. And in a +$25 k, that would be $200 saved.

 

[Jerry1]

So, not that it changes things but you got the penalty because you didn’t implement safe harbor correctly. There’s no guessing or estimating, paid in needs to equal the prior year number.

And, I don't want to beat a dead horse, but I'd fill out the 2210. When you have a situation where income is not earned evenly, which is the case when you did your Roth conversion at year end, it is frequently the case that a penalty can be imposed if annualization is not considered.