Starting RMDs

[traines51]

I'm turning 73 in 2024, so this is the first year of RMD for me. That means a substantial increase in my taxable income. I made estimated payments to the IRS for quarters 1, 2, and 3 based on last year's TurboTax suggestions, then remembered the RMD.  I want to avoid paying penalties. I spoke to my financial advisor who said that he suggests that I make payments equaling 110% of what we owed last year. So I added some last week, and will make a larger Q4 estimated payment to get to 110%. Of course I will owe more at filing time, but will this help us avoid penalties?

[ClarissaA1 · Accepted solution]

There are a few safe harbor options available to taxpayers to help avoid being bit by an underpayment of estimated tax penalty when you file.

Generally, taxpayers with less than $1000 of tax due after subtracting all withholding and refundable credits do not incur a penalty.  For those with a pretty consistent income and withholding, this is a pretty simple method to avoid penalties. 

Where it gets tricky is when the taxpayer's income changes and you are guessing at the total income (and accompanying tax liability) for the year.  

The two alternative methods for avoiding the underpayment penalty are:

1.  Pay at least 90% tax via withholding or estimated payments of the total tax liability for the year.  

2.  Pay 100% of the prior year tax liability via withholding or estimated payments.  For higher income taxpayers, you must pay 110% of the prior year's tax liability.   (The IRS defines higher income as those taxpayers with an AGI over $150,000 on their 2023 return, or over $75,000 if your filing status was married filing separately.)  

Don't forget that any taxes withheld directly from the IRA count towards your payments for estimated tax purposes - if you can have the broker withhold tax from that RMD before they send it to you, you don't have to also send an estimated tax payment for the same funds.