Estimated payments late due to unexpected inheritance

[Mari-Anne]

We were notified in September of 2024 that my husband is named as one of the beneficiaries of my sister-in-law's estate, which includes a sizable 401K account. This has resulted in a hefty tax liability for this year of which we were not aware of in time to make the proper quarterly estimated federal and state tax payments. Is there anything we need to do/to file when we file our income taxes by April 15 next year?  We plan to pay the estimated balance by January 1, 2025.

[AR_CPA2 · Accepted solution]

Dear Mari-Anne,

Please accept my sincere condolences for your loss.  It is good that you are planning to pay the Estimated Tax Liability by the due date of the 4th Quarter payment deadline of January 15, 2025.

What you will do when you're filing the 2024 taxes, do the long form to calculate penalty, Form 2210, it is called the Annualized Income method to show that you received this additional 401K inheritance money in the 4th Quarter.  The annualized income method allows you to make estimated payments based on the actual percentage of annual income received in a given quarter.

Hope this helps.

Have an amazing day. Amita R (CPA 10+ years)

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https://www.irs.gov/instructions/i2210

[Mari-Anne]

Thank you for your quick response.  Even though we owe the penalty, can we get it waived due to circumstances beyond our help?

[AR_CPA2 · Accepted solution]

The circumstances you described earlier that you were notified in September 2024 that you're a beneficiary and then you received the inheritance in 2024 but Quarter 1, 2, and 3 estimated tax deadlines had already passed. That is exactly what Annualized Income method to calculate the penalty is for.  So you will not have the Estimated Tax Penalty for this inheritance distribution as long as you pay your estimated tax by the Q4 Estimated Tax Payment deadline as discussed.