Do I need to increase my January 2025 estimated taxes as I did a Roth Conversion during the end of December 2024?

[Opus 17 · Accepted solution]

You need to do two things.

First, pay 100% of the estimated tax you think you will owe on the conversion by January 15.

Second, when you file your tax return, run the penalty interview even if the program does not suggest it, and use the "annualized income" method to report your income and tax payments by quarter.  This will show the IRS that your tax payments in each quarter matched your income for that quarter.  Otherwise, the assumptions that the IRS makes about payments and income will mean that they will think you owed estimated payments for the conversion in April, June and September, and assess an underpayment penalty.  The penalty form is under the tab for "other tax situations."

[raj5129]

Thanks for your helpful response.  I have found the following info:

"Individuals whose AGI for the preceding taxable year exceeds $150,000 must pay the lesser of 90% of the tax due for the current year or 110% of the tax on the individual’s return for the prior taxable year."

I meet the above requirement as I have already paid more than 110% of the tax for the prior taxable year.  I am debating whether I should pay all "additional" taxes that are resulting from the Roth Conversion (done 12/30/24) by including them with my January estimated tax payment or just wait until I file 2024 return and pay then.

Thanks again!

[Opus 17]

---

@raj5129 wrote:

Thanks for your helpful response.  I have found the following info:

"Individuals whose AGI for the preceding taxable year exceeds $150,000 must pay the lesser of 90% of the tax due for the current year or 110% of the tax on the individual’s return for the prior taxable year."

I meet the above requirement as I have already paid more than 110% of the tax for the prior taxable year.  I am debating whether I should pay all "additional" taxes that are resulting from the Roth Conversion (done 12/30/24) by including them with my January estimated tax payment or just wait until I file 2024 return and pay then.

Thanks again!

---

There are two different penalties, late payment and under-payment.  You can still be subject to the under-payment penalty in your case.

The IRS assumes that all income (including the 1099-R from the conversion) is spread out evenly over the year, even if it is not.  The IRS also assumes that withholding is spread out over the year.  But payments are applied when they are received.  Taking a simple example of a $100,000 Roth conversion in December.  The taxes will be about $24,000.  Because of the IRS assumption about income, the IRS will be looking for a $6000 tax payment in April, June, September, and January.  You missed those first 3 payments.  The solution is to complete the penalty form and use the annualized income method to show the IRS that your income was not evenly distributed, but your payments were appropriate for each quarter's income.  To make that come out right, you have to make a payment for the 4th quarter to cover the lump sum of income in the 4th quarter.  

You may not have to pay 100% of what you owe, depending on your other payments and withholding.  But you probably have to pay something.   You could try using Turbotax (if you can estimate all your other income) or you can try filling out the form manually.

https://www.irs.gov/forms-pubs/about-form-2210