What is the best way to pay estimated Federal Taxes in Retirement?

ShokWaveRider

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This year we will need to think about paying estimated quarterly taxes. I was wondering how to do it. Up until now, we have not known exactly what our taxable income will be. This year we may be able to make a good estimate. Almost 100% of our taxable income will be from SS and CD interest. The IRS says tax is due when payments are made. We are in Florida so not state taxes are not an issue.

I was wondering how folks here manage it.

If CD interest is paid 6 monthly, then is tax due at that time?
If CD Interest is paid annually, can we leave it till the end of the year and not incur penalties?
Should one pay estimated taxes on SS quarterly?

Say one's estimated Federal tax on all sources of income for a given year is $25k but only 10% of that is realized quarterly, does one still have to pay estimated taxes quarterly, even if one has not received the income until year end? State taxes are not applicable in Florida.

Also, what is the best way to pay the estimated taxes if withholding is not a viable option?

I am thinking making regular payments via IRS.GOV via systematic withdrawals.

Any ideas would be appreciated.
 
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Retired here, pay quarterly taxes mainly on CD interest. Fortunately, Schwab has a tool that shows you exactly when and how much is paid out each month going forward 12 months, so it is easy for me. Tax is due on income paid only during that preceding quarter. For your 1 year CD that means no tax is due until the quarter in which it matures. It also means that your taxes due each quarter may vary wildly.
i have an account at IRS.gov and have that account tied to an online bank (Marcus). You can pay each quarter and even pay in advance if you know your future tax bill amount.
 
I take care of Moms financials and taxes and have a very high percentage with held from her Req Min Distributions. Found this was much easier than making sure she has enough in her checking acct when state and feds hit her acct for q’tly payments.

I’m retired andI have an alternative approach on state/fed taxes. I got a little fun part-time consulting gig and have approx 80% of my payroll go to taxes. End of the year it covers my state/Fed tax burden and whatever is left over I buy I-bonds with.
 
I have done quarterly payments within the safe harbor, but for 2023, I just took an IRA distribution near the end of the year specifically to withhold all of it for taxes. I think I will keep doing that going forward.
 
Most people find paying from withholding most convenient.

I have done quarterly payments within the safe harbor, but for 2023, I just took an IRA distribution near the end of the year specifically to withhold all of it for taxes. ...
Yes, the lazy person's tactic: In December take an IRA withdrawal at least equal to the safe harbor amount (100% or 110% of previous year's taxes) and designate it as 100% Federal withholding. Done. No estimating or tracking anything. Ever.

I learn this trick here on the forum and have been successfully using it for several years. One wrinkle for me is that Schwab will not permit 100% withholding, only 99%. So my withdrawal amount has to be 101% of the safe harbor. This works for my state tax payments as well, though I can't say for sure that it works in all states.
 
^This

I have a modest pension that I am able to withhold enough to cover most of our tax bill. If we fall short, I will withhold from my small inherited IRA's RMD in December. DW starts RMDs on her IRA in 2025, so that will be another avenue for tax withholding.
 
If I didn't have a small pension that I can use federal withholding to pay my estimate of my federal taxes due then I would use the method that Old Shooter desctibes above, but with a twist.

In December, I would do a Roth conversion for 101% of what I want to pay for estimated taxes and have 99% federal tax withholding. Then I would transfer from my brokerage account to my Roth and amount equal to the federal withholding as a rollover contribution.

The net impact is a Roth conversion for 101%, but with the benefit of effecively making an estimated payment of taxes in December that the IRS considers as done continually throughout the year in assessing any underpayment penalties. Just be careful to adhere to the timing of rollover contrbutions... perhaps do the first one in early December and do it one day later each subsequent year.
 
Yes, the lazy person's tactic: In December take an IRA withdrawal at least equal to the safe harbor amount (100% or 110% of previous year's taxes) and designate it as 100% Federal withholding. Done. No estimating or tracking anything. Ever.

...

This works for my state tax payments as well, though I can't say for sure that it works in all states.
This is also what I do. I also withhold state taxes (Indiana) and it works fine here.
 
After a year where we had to pay penalties for under payment of estimated taxes, I do the safe harbor of 110% (of previous year tax due) in pre-set quarterly payments.
 
Lots of different ways to handle this.

I've been paying quarterly estimates for almost 40 years. I have been self employed and now FIRED.

I take the safe harbor approach. When I file my return each year, usually in March, I take the amount of that year's tax liability and divide it in 4. Then I pay that amount each quarter (April, June, September and January 15). No worries, I settle up with the IRS next April if I'm either long or short. Repeat the next year.

I don't withhold anywhere, I just keep the cash on hand all year to pay taxes when due. That's just what I'm used to. Nothing wrong with withholding.

As long as I pay what I owed last year I know I'm fine. If I overshot my tax liability I apply it towards the first quarterly payment in April.
 
Yes, the lazy person's tactic: In December take an IRA withdrawal at least equal to the safe harbor amount (100% or 110% of previous year's taxes) and designate it as 100% Federal withholding. Done. No estimating or tracking anything. Ever.

I learn this trick here on the forum and have been successfully using it for several years. One wrinkle for me is that Schwab will not permit 100% withholding, only 99%. So my withdrawal amount has to be 101% of the safe harbor. This works for my state tax payments as well, though I can't say for sure that it works in all states.

As I read the IRS rules, if you owe more than $1000, this strategy could result in penalties and interest.
 
Most people find paying from withholding most convenient.

Below is something from a old thread that might be useful if you want to do withholdings on a Roth conversion but also want the full tIRA amount to end up in your Roth account.

If you do Roth conversions and withhold and then make a deposit for the withholding as a rollover contribution to the Roth within 60 days. And if you do it within 7 days it doesn't use up your once every 12 month indirect rollover limit.
 
I find EFTPS to be the most straightforward/easiest for me. I don’t have any withholding opportunities. I usually use the safe harbor rules base on prior year taxes. Then I can schedule all 4 estimated tax payments in EFTPS at once. I often do this after completing our tax return.

I believe the 110% rule for safe harbor starts at prior AGI $150K for MFJ.
 
To me the easiest way to estimate taxes is using an online calculator like https://www.dinkytown.net/java/1040-tax-calculator.html. The 2024 version should be available soon, and it will handle your situation no matter how simple/complex/unique.

As for actually making IRS/UST payments, I have been very happy with EFTPS https://www.eftps.gov/eftps/. Setting it up is a little cumbersome, but you only have to do that once, I have been using it for years.

Your state should have a similar online quarterly income tax payment system too if applicable. Ours does and it's very easy to use.

I actually do a spreadsheet to track all my income source in real time, but I could just as easily use the tax calculator above, pay 1/4th for Q1, Q2 and Q3, and then do an adjustment up or down in Q4 if necessary.

This method has worked well for me for 13 years...best of luck.
 
Almost 100% of our taxable income will be from SS and CD interest.

Are you sure you need to pay quarterly taxes? If your tax liability will be less than $1K, you are allowed to wait and pay it in April of the following year with no penalty.

For 2023 you could have received $50K in SS and $27.5K in interest before you would owe $1K in tax.

I suggest plugging your own numbers into an online tax calculator to get an idea of how much you'll actually owe for 2024.
  • If it's less than $1K, don't worry about it now. Just plan to owe next year.
  • If it's a lot less than your 2023 tax, then divide the 2024 amount by 4 and schedule the payments at the same time you file your 2023 tax return using one of the methods at the irs.gov website.
  • If it's more than your 2023 tax, then multiply the 2023 tax by 1.1, divide that by 4 and schedule the 4 payments when you file your 2023 tax return. You'll owe next year but there won't be a penalty.
 
We have to pay ~$20k this year of which $14k is repayment of DW's ACA subsidies. Without those our tax liability would have been $6k. They will not be an issue for 2024 as she is now eligible for Medicare. I am not sure if the $14k is classified as taxes for Safe harbor purposes. :confused:
 
As I read the IRS rules, if you owe more than $1000, this strategy could result in penalties and interest.
I dunno. Apparently the IRS does not read its rules that way. In 2022 we sold a lake home and I used the safe harbor rules. We owed the feds a balance of $78K and they cashed the check without complaint. Same-o with the state on a somewhat smaller amount.
 
As I read the IRS rules, if you owe more than $1000, this strategy could result in penalties and interest.

No, withholding is always treated as if it were taken equally throughout the year, regardless of when it was actually taken.

This is because if you look at any tax form that shows withholding (other than a W-2G for gambling winnings) there are no dates on it, so the IRS has no way to know when you paid. Most withholding deposits are sent to the IRS as a lump sum without any individual info. If they receive $X from a broker in April and $Y in December, they have no way to know which individuals it was for. The only thing that matters is the total withholding on all the 1099s the broker issues for that year has to equal $X+$Y.
 
To me the easiest way to estimate taxes is using an online calculator ... <snip> ... This method has worked well for me for 13 years...best of luck.
Glad it works for you. I am far too lazy to do all that work and it is unnecessary whether you pay the safe harbor amount quarterly or at the end of the year using withholding. I do the latter. I don't see it as a matter of luck. I'm just playing the game according to the IRS rules.
 
i have an account at IRS.gov and have that account tied to an online bank (Marcus). You can pay each quarter and even pay in advance if you know your future tax bill amount.

Is it easy to pay with an IRS.gov account? Are there fees? Do you need an IDme account to do this?
 
If I didn't have a small pension that I can use federal withholding to pay my estimate of my federal taxes due then I would use the method that Old Shooter desctibes above, but with a twist.

In December, I would do a Roth conversion for 101% of what I want to pay for estimated taxes and have 99% federal tax withholding. Then I would transfer from my brokerage account to my Roth and amount equal to the federal withholding as a rollover contribution.

The net impact is a Roth conversion for 101%, but with the benefit of effecively making an estimated payment of taxes in December that the IRS considers as done continually throughout the year in assessing any underpayment penalties. Just be careful to adhere to the timing of rollover contrbutions... perhaps do the first one in early December and do it one day later each subsequent year.

So, for those receiving a modest pension, we can increase our federal withholding percentage at the end of the year to pay for the federal taxes due for that year?
 
:facepalm:

I didn't realize that there was an income threshold on the AGI that requires 110%. Thanks for pointing this out.
 

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