are estimated tax payments required on investment withdraws to avoid a penalty for underpayment?

[DavidC7]

Are estimated tax payments required on investment withdraws to avoid a penalty for underpayment?  Or can any gain generating taxes be paid without penalty when filing taxes in April?  I'm now retired without wages, only investment income.

[Hal_Al]

Q. Are estimated tax payments required on investment withdraws to avoid a penalty for underpayment?

A. No.

You should make estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
- 2. You expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your current year’s tax return, or  100% of the tax shown on your prior year’s tax return. (110% if your AGI was more than $150K) . Your prior year tax return must cover all 12 months.

If you don't meet the $1000, the 90% or 100% rule at tax filing time, you can be assessed an underpayment penalty. 

[DavidC7]

withdraws are from taxable investments not tax-deferred accounts.

[MinhT1]

The IRS expects you to pay estimated taxes during the year to cover all types of income (wages, self-employed income, retirement income, interest, dividends, capital gains) if you think that withholding taxes and refundable credits are insufficient to cover your tax liability under certain rules. 

The IRS says:

Generally, you must make estimated tax payments for the current tax year if both of the following apply:

• You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
• You expect your withholding and refundable credits to be less than the smaller of:
  • 90% of the tax to be shown on your current year’s tax return, or
  • 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

Please read this IRS FAQ for more information.

[DavidC7]

2024 taxable income included wages and investment (CG and div).  2025 in retirement will be substantially less with draws from taxable investment to support expenses.  Can I just wait and pay and taxes when filing my return next April? (without any penalty)

[Hal_Al]

Q. Can I just wait and pay and taxes when filing my return next April (without any penalty)?

A. Probably not. You have to do the math. 

If you expect line 18, of your 2025 form 1040, to be less than $1000,  then you can wait.

TurboTax (TT) can do estimates and prepare the quarterly payment vouchers. In your 2024 software, enter at:

Federal Taxes or Personal (H&B version)

-Other Tax Situations

  -Other Tax Forms

    -Form W-4 and Estimated Taxes - Click the Start or Update button

On the next screen answer No to the W-4 question

Or you can use this tool to do an estimate of your tax for next year (the tool is actually for 2024, but it's close enough)    https://turbotax.intuit.com/tax-tools/calculators/taxcaster/?s=1

[Hal_Al]

What your withdraw from investment accounts is not income. Just like before you retired, the reportable income is only the interest, dividends and capital gains earned in those accounts. 

[KrisD15]

Probably not. 

It is difficult to give you an answer without knowing the numbers, but if your income will be substantially less, the idea that you will fulfill the second requirement seems unlikely. If your income will be less, your withholding will be less, so you SHOULD NOT expect your withholding and refundable credits to 100% of the tax shown on your prior year’s tax return. 
 

Since you (probably) won't fulfill that requirement, you need to consider the others.

Will you expect to owe at least 1,000 tax?

Consider your standard deduction, and how much over that you expect to claim as taxable income. Apply that to your expected tax rate. 

As stated in the answer above, you can use an online estimator to help. 

@DavidC7