In January, I am surrendering an annuity that will have a $28,725 taxable gain. In addition to the tax, I will need to pay the 10% early withdrawal penalty to the IRS as I am only 41. There are no surrender charges.
I can specify the amount of federal withholding to the insurance company. Based on estimates for my 2019 tax liability, I would need to withhold 33% of the gain in order to meet at least 90% of the tax + penalty I anticipate to owe for 2019. I was under the impression I need to elect this level of withholding in order to avoid an underpayment penalty.
However, I came across this IRS guidance (https://www.irs.gov/faqs/estimated-tax/large-gains-lump-sum-distributions-etc/large-gains-lump-sum-distributions-etc) . I think it says I just need to make sure my estimated tax payments in 2019 are at least “100% of the tax shown on your prior year’s tax return”. My 2018 tax will be much lower than in 2019 (as a result of the distribution occurring in 2019), so this would seem to meet the IRS guidance of taking “the smaller” of the 90%/100% option.
All this suggests to me that I don’t need to elect any withholding at all for the distribution and just to make sure my estimated 2019 payments are at least as much as in 2018. Since most of my income is foreign sourced (i.e. no withholding), I will make estimated tax payments through the year anyway.
Am I interpreting this all correctly or is there something I am missing?
Thank you in advance for any insight!
Why continue to play the "guess and hope for the best" game with this? When you receive the payout, if the payor will not withhold what you request (weather they are required to by law or not, depends on the type of annuity) then once received send 30% of it to the IRS, or the percentage of difference that the payor did not withhold, and be done with this until time to file the 2019 tax return. Then if you overpaid, you'll get a refund. If you underpaid, it will definitely be under the threshold for paying any underpayment penalties.