The quarterly tax club: new member, expensive lesson

[Lorenzo]

Well, last year I paid $70K in federal taxes. No sorry, I am not paying that this year to satisfy Safe Harbor, since I anticipate significant reduction to around $4K based on my income. I probably will overpay a little this first year in retirement to avoid penalty though.

Looks like with respect to the penalty, being newly retired (over age 62) is one of two reasons the IRS may waive the penalty:

The law allows the IRS to waive the penalty if:

1. You didn't make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
2. You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.

Topic no. 306, Penalty for underpayment of estimated tax | Internal Revenue Service

Topic no. 306, Penalty for underpayment of estimated tax

www.irs.gov

 

[audreyh1]

I do the “lazy safe harbor” if my income drops. For the Q4 Jan 15 payment I have already figured my likely total tax liability and I don’t pay the full 1/4 amount based on prior year taxes but just enough to get me over a little over the current year 90% safe harbor rule. This has avoided a big refund.

In years where I had huge swings in taxable income I rolled up my sleeves and used the annualized income method based on actual taxable income received each tax quarter. I had to create some spreadsheets to be able to do this, plus income reports generated by Quicken. And you have to file form 2210 to show that you paid the amount owed each quarter and avoid penalty. Fortunately our taxable income is not so variable anymore and I can do the method in paragraph 1.

 

[surprising]

I do the “lazy safe harbor” if my income drops. For the Q4 Jan 15 payment I have already figured my likely tax liability and I don’t pay the full 1/4 amount based on prior year taxes but just enough to get me over a little over the current year 90% safe harbor rule. This has avoided a big refund.

In years where I had huge swings in taxable income I rolled up my sleeves and used the annualized income method based on actual taxable income received each tax quarter. I had to create some spreadsheets to be able to do this, plus income reports generated by Quicken. And you have to file form 2210 to show that you paid the amount owed each quarter and avoid penalty. Fortunately our taxable income is not so variable anymore and I can do the method in paragraph 1.

What about unexpected large expenses? What if I have a $10K home repair later in the year where I have to sell stock and incur capital gains I wasn't expecting? I shouldn't have to pay a penalty for unexpected income.

 

[audreyh1]

What about unexpected large expenses? What if I have a $10K home repair later in the year where I have to sell stock and incur capital gains I wasn't expecting? I shouldn't have to pay a penalty for unexpected income.

No. If you use safe harbor based on prior year tax owed you are still safe even if your current year taxable income is significantly higher.

 

[erkevin]

Turbo tax will tell you the quarterly payments required for the following year. For me April is the toughest month. Both IRS and property tax is due.

TaxAct also provides the following year's required estimated taxes

 

[surprising]

No. If you use safe harbor based on prior year tax owed you are still safe even if your current year taxable income is significantly higher.

Okay, so I have to get somewhat close on my first year of retirement, but then after that I can use safe harbor to avoid penalties. If I ever have an abnormally large tax year, I can decide to safe harbor again for following year and most likely overpay, or I can try to guess again.

 

[UpQuark]

What about unexpected large expenses? What if I have a $10K home repair later in the year where I have to sell stock and incur capital gains I wasn't expecting? I shouldn't have to pay a penalty for unexpected income.

I think when you use form 2210 you can explain/prove that the extra taxes were due to an unexpected repair bill, in order to get the penalty waived.

If you are being surprised by December income from mutual funds, my FA at Fidelity explained to me that mutual funds are required to pay out capital gains but ETFs are not. So the years between retiring and starting RMDs can be advantageous for doing long term cap gain harvesting while simultaneously moving to ETF positions (example, I sold FXAIX and used the money to purchase SPLG).

 

[MichaelB]

I do the “lazy safe harbor” if my income drops. For the Q4 Jan 15 payment I have already figured my likely total tax liability and I don’t pay the full 1/4 amount based on prior year taxes but just enough to get me over a little over the current year 90% safe harbor rule. This has avoided a big refund.

In years where I had huge swings in taxable income I rolled up my sleeves and used the annualized income method based on actual taxable income received each tax quarter. I had to create some spreadsheets to be able to do this, plus income reports generated by Quicken. And you have to file form 2210 to show that you paid the amount owed each quarter and avoid penalty. Fortunately our taxable income is not so variable anymore and I can do the method in paragraph 1.

+1

The safe harbor number and annualized installment calculations are important for us retired folk. Basic toolbox kind of thing. If a substantial part of the yearly investment income is received at year end the penalty will be substantially less.

 

[audreyh1]

Okay, so I have to get somewhat close on my first year of retirement, but then after that I can use safe harbor to avoid penalties. If I ever have an abnormally large tax year, I can decide to safe harbor again for following year and most likely overpay, or I can try to guess again.

Yes basically. Do you know what your investments are likely to return?

If you are trying to avoid penalty but don’t want to pay quarterly estimated taxes based on prior year taxes because you would way overpay, then using the annualized income method is your safest approach. This calculates taxes to pay based on actual income received YTD for each tax quarter and annualizes that to calculate taxes owed. Then you pay a prorated percentage. And use form 2210 to show that you did pay estimated taxes when they were owed based on when income was received. You might want to check that out.

 

[Livefree]

I have been doing Roth conversions and pay quarterly taxes. I also have soc security withholding taken out, (but isn't enough to meet the requirements.) If the market is down, and I elect to convert more in say, quarter 2, do I still need to pay more taxes THAT quarter, or because I'm meeting 100% of previous years taxes, is it considered Safe Harbor?

I'm paying equal payments each quarter. So, I'm wondering if I convert more in one quarter, and don't pay any extra for that quarter, will I be covered due to having withheld 100% of the previous year, by years end.

 

[cathy63]

I have been doing Roth conversions and pay quarterly taxes. I also have soc security withholding taken out, (but isn't enough to meet the requirements.) If the market is down, and I elect to convert more in say, quarter 2, do I still need to pay more taxes THAT quarter, or because I'm meeting 100% of previous years taxes, is it considered Safe Harbor?

I'm paying equal payments each quarter. So, I'm wondering if I convert more in one quarter, and don't pay any extra for that quarter, will I be covered due to having withheld 100% of the previous year, by years end.

If your combination of withholding and equal quarterly payments equals 100% of last year's tax liability (or 110% if AGI last year was greater than $150K), then you will not owe an underpayment penalty.

 

[Jerry1]

If your combination of withholding and equal quarterly payments equals 100% of last year's tax liability (or 110% if AGI last year was greater than $150K), then you will not owe an underpayment penalty.

Exactly. Safe harbor, is just that - safe harbor from penalties and interest.

 

[audreyh1]

I have been doing Roth conversions and pay quarterly taxes. I also have soc security withholding taken out, (but isn't enough to meet the requirements.) If the market is down, and I elect to convert more in say, quarter 2, do I still need to pay more taxes THAT quarter, or because I'm meeting 100% of previous years taxes, is it considered Safe Harbor?

I'm paying equal payments each quarter. So, I'm wondering if I convert more in one quarter, and don't pay any extra for that quarter, will I be covered due to having withheld 100% of the previous year, by years end.

Yes.

 

[TickTock]

N00b safe harbor question - from IRS.gov (underlining is mine):

Avoid a penalty​

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%.

There is no line on 1040 labeled "tax shown". L16 is "Tax", L24 is "total tax". Which line is used?

 

[TheWizard]

I've been using withholding for my pension/annuity income since 2013, then also for my SS income, then also for my RMD income.
These w/h percentages automatically adjust the withheld amount for changes in those income streams for whatever reason, so one less thing to deal with.

I have been doing fourth quarter estimated tax payments for Roth conversions, but since starting RMDs a few years, those conversions have been small, so very little needed for the estimated payment...

 

[audreyh1]

N00b safe harbor question - from IRS.gov (underlining is mine):

Avoid a penalty​

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%.

There is no line on 1040 labeled "tax shown". L16 is "Tax", L24 is "total tax". Which line is used?

Total tax line 24.

 

[TickTock]

Thanks, audreyh1!

 

[marko]

I've been supposed to pay estimateds for the past 50 years but I refuse to. I think about taxes one day a year when I write the check on April 14.

My accountant hates me. I'll pay the penalty. Don't care. BTD.

 

[cathy63]

N00b safe harbor question - from IRS.gov (underlining is mine):

Avoid a penalty​

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%.

There is no line on 1040 labeled "tax shown". L16 is "Tax", L24 is "total tax". Which line is used?

Really it's neither one. Line 24 is the easy approximation, but the actual formula is in the instructions for Form 2210 Line 8.

If you have a number on Line 23 or Line 32 of your return, or if you get health insurance through the ACA exchange then you should look up the exact formula because the number on Line 24 is not going to be accurate.

 

[audreyh1]

Interesting. We never got ACA subsidies so I never dealt with that. Or self employment since 2000 or refundable credits.

 

[audreyh1]

I've been supposed to pay estimateds for the past 50 years but I refuse to. I think about taxes one day a year when I write the check on April 14.

My accountant hates me. I'll pay the penalty. Don't care. BTD.

DF would just deal with it once a year too. But what he did was pay the next year estimated taxes all in one go, the same day he paid the balance on his tax return.

 

[frank05]

I've been supposed to pay estimateds for the past 50 years but I refuse to. I think about taxes one day a year when I write the check on April 14.

My accountant hates me. I'll pay the penalty. Don't care. BTD.

By the end of this year, the IRS will no longer accept paper checks due to an executive order.

 

[marko]

By the end of this year, the IRS will no longer accept paper checks due to an executive order.

So you mean I'll have to personally go down to the IRS office with cash?
Well, I don't actually, physically write a check y’know. It's a figure of speech.

 

[YellowSubmarine]

Got a letter from the IRS yesterday saying they owe me $100 because I overpaid the $800 penalty for underpaying my 2024 taxes. I would never have known about paying this penalty if the IRS hadn't sent me a letter. How many years have I been paying this and not even knowing it??
My guess is probably 2 since that's when I decided to get my head out of the sand and get serious about getting FI (too late for RE).

It never occurred to me to pay quarterly taxes. Apparently it never occurred to the accountant to tell me about it either. I know I need to get serious about learning about taxes. One thing at a time.

I thought quarterly taxes were for business owners, not people who got a W2. I knew I had big tax bills the last few years but I budgeted for it and thought that was that.

I sent the first 2025 quarterly payment to the IRS yesterday. I am still trying to wrap my head around how I am supposed to estimate and pay my taxes to within $1000 of what will be owed. I just paid 1/4th of what was due for 2024, like most people. I don't have a crystal ball. If this year is like last year it could be enough. Or not. And I will have to pay another penalty, but much, much smaller.

Now I need figure out if I have been paying a penalty for underpayment of state taxes too.

I do Quarterly taxes since 1982, never an issue. These days retired, I utilize Turbo Tax that automatically calculates the Quarterly payment and I file with the IRS for automatic, quarterly, withdraws. This is a single visit to the website and less than 15 minutes for prep. fyi...TurboTax calculates the safe withdraw/payment amount based upon the past tax year. This can avoid and extra fees or penalties. Then, I reconcile the taxes with a filed tax return for that year.

 

[TickTock]

Really it's neither one. Line 24 is the easy approximation, but the actual formula is in the instructions for Form 2210 Line 8.

If you have a number on Line 23 or Line 32 of your return, or if you get health insurance through the ACA exchange then you should look up the exact formula because the number on Line 24 is not going to be accurate.

Thanks, cathy63!

No L23 or L32 numbers on our return. We do get health insurance through ACA, so I crunched through Form 2210. We ended up underpaying our premiums, so had to pay tax on the underpayments. So it ends up being L22 (which equals L24 for us).

Good to know the full method!

If I'm seeing it right, overpayment of ACA (creating refundable credits) flows from Form 8962 to Schedule 3 L9, which is part of Schedule 3 L15, which flows to 1040 L31, which is part of 1040 L32. :whew: