@bextel wrote:
@fanfare wrote:
"instead withholding my expected tax burden from the year-end IRA distribution. "
That's exactly what I suggested above.
Withholding at least 90% of your tax burden will eliminate any penalty. (the current year rule).
So you are suggesting that it's NOT necessary to make quarterly payments as long as I withhold 90% of my year's tax from the year-end IRA distribution? Is this any different in the IRS's eyes than sending in an estimated tax payment for 90% of the year's tax in the last quarter (even for someone who receives income distributed evenly through the year)? Then why wouldn't everyone avoid the penalty for non-timely withholding payment this way? Or is there something about the scenario I presented that makes it different, such as the fact that IRA distribution was all at year-end -- which @Opus 17 said doesn't eliminate the need for quarterly payments? (Please consider my initial Social Security related question in the response.) Thanks!
As a threshold matter, I believe I have seen questions from other taxpayers who made the lump sum estimated tax payment and were still hit with an underpayment penalty. So while the IRS instructions suggest this won't happen as long as you meet certain conditions, I am not convinced that only making a lump sum payment is enough. There seems to be a different treatment of taxpayers who make quarterly estimated payments, and taxpayers who only make a payment in the 4th quarter. Or, I am remembering the cases wrong.
One of the things the IRS says is that you will not be charged a penalty if you make enough estimated payments and withholding over the course of the year, to equal 90% of the current year tax bill or 100% of the previous year tax bill. https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty
So if we look at 2023, suppose your total income tax, no matter how it was calculated, was $10,000. No matter what the tax in 2024 will be (based on your withdrawal and the effects on SS), you would be exempt from a penalty if you made 4 quarterly payments of $2500 (April 15, June 15, Sept 15, and Jan 15); or if you had $833 per month withheld from your SS benefit. As long as you cover that 100% of last year figure, you should not owe a penalty. But I still believe that must be met with periodic payments--I don't believe a $10,000 lump sum on January 15 will exempt you from the penalty, even though making 4 periodic payments would. It's just something I think I've seen before on this board.
Alternatively, you could try having $400 per month withheld from SS, and then pay the other $5200 as a lump sum with the IRA withdrawal. That would also cover it once you use the annualized method on form 2210, because the monthly withholding covers the requirement to pay something each month for the SS, and the lump sum covers the irregular income.
Again, although I can't point to a specific person, I believe I have seen complaints here that indicate they were charged a penalty for lump sum income even when they made a payment. I could be wrong. My advice is conservative, pay something each month. The opposite position, pay nothing until January 15 and then pay the minimum amount under the regulation (100% of last year's tax or 90% of this year's tax) is supported by some IRS documents, but those documents are sometimes incomplete.
