Estimated tax for 2023--amt to send from RMD--conflicting info

[ArchesNationalPark]

Soon we are going to take our 2023 RMD. Will have the custodian withhold & send to the IRS the $ needed for our 2023 estimated taxes. (we didn't make Q payments).  Not sure how much due to conflicting info.  Using $15k as a sample fed tax liability for 2022 and all other numbers relative to that--

• Is it correct that per IRS rules, if 2022 total fed tax liability was $15k, safe harbor for 2023 is $15k from the RMD goes to the IRS for withholding? (for AGI under $150k). 
• Tho we didn't use them, the four1040-ES forms generated on our 2022 Turbo Tax form with a sample 2022 tax liability of $15k add up to a total of only $7945, which is abt 52%.  
• After seeing what the 1040-ES forms added up to, we estimated our 2023 taxes (using TT 2022, so not ideal). It shows we only need to send in $8602 as estimated for 2023 to avoid a penalty, which is about 57% of the $15k fed tax liability in 2022 that were are using in this example.

We don't understand why is TT is coming up with much lower numbers than what we think is the standard rule (100% of last years liability) What are we missing and what's the correct amount to send in from the RMD for this example?  We anticipate owing an amount slightly higher than last year. 

Thank you very much for any insights and help. 

[fanfare]

"the standard rule (100% of last years liability)"

If your estimate is based on prior year's tax, you know that when you file by April 15, which is also the first estimated tax payment due date.

Without W-2 withholding or other estimated tax payments,

that's the amount you want withheld.

@ArchesNationalPark 

[fanfare]

If your witholding covers your tax as described , then you don't have to make estimated tax payments.

@ArchesNationalPark 

[ArchesNationalPark]

Thank you for the replies. Turns out the RMD will cover it all.  They treat RMD as spread thru the entire year so no Q payments needed.

The question I have is how much to have withheld from the RMD for the fed:

• the amount of our fed tax liability for 2022 ($15k in my example),
• the amt our TT 2022 return said we should pay via ES-1040 forms ($7945 total in my example) or
• the amt on an our estimated 2023 TT return (done for now in TT 2022) that reduces the penalty to $0 ($8602 in my example). 

Thanks. 

[fanfare]

Your withholding should be

at least 100%  ( 110% for certain high income taxpayers) of your 2022 tax,

or 90% of this year's tax, whichever is smaller.

The prior year's tax is the only amount you know for certain.

This year's tax is an estimate.

@ArchesNationalPark 

[ArchesNationalPark]

Thanks.  I don't understand why TT is giving lower numbers of estimated tax due, but 100%  of 2022 is a known number and sounds good to me. We aren't in the bracket for paying 110%

[Mike9241]

from your 2022 tax you can subtract other withholding such as from wages or other sources. we can't see what Turbotax is doing. several possibilities so you have to be careful. 

1) Turbotax may be using your 2022 withholding even if it's from what you withheld from the 2022 retirement distribution rather than just the amount withheld from other sources. if the other withholding is not going to repeat in 2023 you have to increase that withholding from the RMD 

2) Turbotax may be using the 90% rule and assumes your 2023 tax will be the same as 2022. in its simplest form the 90% rule is simply that there won't be any federal penalties if your withholding equals 90% of your 2023 tax. 

 3) there may be other possibilities

in short, to avoid penalties your federal withholding (i'm assuming no estimated tax payments) must equal either 90% of 2023 tax or 100% of 2022 tax.  since for most the 2023 tax can't be determined until the 2023 return is prepared the 100% of 2022 tax is the safer option. 

if you have a state income tax, the rules will differ. 

[ArchesNationalPark]

Thank you Mike!  That makes complete sense. It's probably subtracting out the amt we sent in via RMD last year.  Will just have them withhold 100% of 2022 and call it good. 

[Lani6]

Re: Estimated tax for 2023--amt to send from RMD--conflicting info

I have been reading commentary from TT community about using RMD's in lieu of estimated taxes and would appreciate your thoughts.

(1) I must be missing something about figuring out the amount to be paid from the RMD. I believe the easiest way is based on a known factor, namely your prior year return, hence pay 100% (or110% if applicable to higher incomes) of the prior year taxes. Am I missing something?

(2) In a prior thread, but the same subject --https://ttlc.intuit.com/community/taxes/discussion/in-general-yes-you-can-apply-all-of-your-rmd-as-tax-wit/01/155342#M64046

there was a reference to using Form 2210, Underpayment of Estimated Taxes. If the RMD is indeed allowed in lieu of estimated taxes, why would one need to complete a Form 2210?

(3) My main question is how to enter the RMD into TT and nowhere have I found a specific answer for that.

1. TT provides entry boxes for dates and amounts for 4 estimated tax payments.  Do you enter 1/4 of the RMD in each of the 4 boxes, or zeroes in the first 3 boxes and the entire RMD in the last quarter since the RMD will generally be received in December? If the RMD is considered to be “withholding” and not estimated taxes, completing the entries in these 4 boxes would seem to be incorrect.
2. Or, if this is indeed "treated as" withholding, the above link mentions Form 1040, line 25d (which is not actually an entry, but the sum of 25 a,b, and c); or Schedule 3, line 10, which is the amount paid with request for extension to file. I question whether there will be a mismatch (by IRS computers) with these entries. 
3. Or, in TT, under Federal Taxes, Deductions and Credits, Other Income Taxes Paid in (year), there is an item for "withholding not already entered on a W2 or 1099." 
4. What is the appropriate place for entering into Turbo Tax the RMD distributed to pay for income taxes?

(4) Lastly, like some other commentors, I would like authority for using RMD's in this manner.  Again, in the above link, a reference was made to Code section 6654(g), Failure by Individual to Pay Estimated Taxes. 

Section (g) reads as follows: (g)Application of section in case of tax withheld on wages

(1)In general. For purposes of applying this section, the amount of the credit allowed under section 31 for the taxable year shall be deemed a payment of estimated tax, and an equal part of such amount shall be deemed paid on each due date for such taxable year, unless the taxpayer establishes the dates on which all amounts were actually withheld, in which case the amounts so withheld shall be deemed payments of estimated tax on the dates on which such amounts were actually withheld.

(2)Separate application. The taxpayer may apply paragraph (1) separately with respect to—

(A) wage withholding, and

(B) all other amounts withheld for which credit is allowed under section 31.

This Code section mentions estimated taxes and withholding, but nowhere does it mention RMD's, nor seem to clearly state, that RMD's are the equivalent of withholding.

Can you or anyone provide a citation/authority which makes this clearer? Thank you for your help. 

[fanfare]

withholding is not Estimated Tax.

the various forms require you to enter those in the desgnated spots.

It is the total of withholding + estimated tax that has to meet the minimum requirement.

The default rule (applied by Form 2210) is evenly spaced payments.

That's why you need to use Form 2210, particullarly if your estimated tax payments are not evenly spaced

@Lani6 

[VolvoGirl]

@Lani6 

#(2)  Yes if you have enough tax withholding taken out of the RMD you won't need to send in estimated payments.   You only need to fill out form 2210 if you end up with a tax due when you file your tax return and owe a penalty on 1040 line 38 for not paying in enough during the year from withholding and estimates.

If you do not pay in enough tax from withholding and estimates, you may have to pay a penalty for underpayment of estimated tax. The penalty is an Estimated amount. Even if you are getting a refund you can still owe a penalty for not paying in evenly during the year. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. It is included in your tax due or reduces your refund.  

#(3)  The RMD has nothing to do with paying estimates or entering estimated payment you paid.  And your other questions are completely wrong.

You enter the RMD from the 1099R you will get at the end of the year in January.  Any withholding will be in box 4.  You only enter it from the 1099R, nowhere else.  RMD withholding will show up on 1040 line 25b from Forms 1099.  Here is a  1099R to see box 4,   https://www.irs.gov/pub/irs-pdf/f1099r.pdf 

For #(4)  You have to separate the RMD from the withholding.  The RMD is the gross Required Minimum Distribution you have to take from your IRA or 401k account.   You can have them take tax withholding out of the RMD.  Or you can pay in extra quarterly estimated payments to cover the tax due on your RMD.

You don't actually pay the tax on the 1099R.  You have taxes withheld like from your paycheck. You still have to enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b.  The withholding will show up on 1040 line 25b.

Hope that covers it and is clear.  

[Lani6]

Thank you for your timely response. Your information about entries on F 1099R was particularly helpful. None of the comments I read had clarified that before. Not having used this method before (having made Est Tax quarterly in the past), I did not know that -- when the brokerage issues a 1099R on the amount of the taxable RMD -- that they would also report the payment to IRS from the RMD as an entry for withholding on the 1099R.  As our RMD will more than cover the tax due (based on 110% of last year's return), it appears no quarterly estimated payments will be necessary; hence, no entries in TT for quarterly payments.  Assuming the brokerage properly reports the payments as withholding to IRS, the amounts will "flow" directly from the 1099R to line 25b of the 1040. Again, thank you for your time and effort with the explanation your provided, especially the 1099R entries.

     I have read several articles that state "IRS has a special rule favorable to taxpayers," such that amounts withheld from RMD distributions are considered paid evenly throughout the year, even if made in a lump sum payment at year-end. But other than IRC 6654(g) which was cited in another comment, and which I quoted in my inquiry, I have found no "IRS special rule" which clearly specifies using the term "RMD's" as withholding treated as paid evenly throughout the year, and therefore can be used in lieu of estimated taxes. Do you know of any citation from IRS tax law/regulations/Revenue Ruling/etc.  that clearly specifies RMD's for this treatment? Thanks again.

[VolvoGirl]

@Lani6   Just want to make sure you are clear,  you said.....As our RMD will more than cover the tax due (based on 110% of last year's return)....  You mean the withholding on the RMD?  The RMD is the total distribution.  Just the tax withholding will cover the tax due on your return.  So the amount they take out of your RMD will be more than 110% of last year's tax?  

I think the withholding is like withholding from your paychecks.  It is assumed to be paid evenly during the  year if it needs to figure a penalty for underpaying your taxes.   @dmertz  can you help explain it?  

Maybe Form 2210 will help.  

https://www.irs.gov/pub/irs-pdf/f2210.pdf

IRS Form 2210 Instructions
https://www.irs.gov/pub/irs-pdf/i2210.pdf

[dmertz]

Lani6, regarding your thought #2, perhaps you misunderstood this part my post that you referenced.  It does say that having taxes withheld instead of making estimated tax payments can help you avoid needing to file Form 2210.

As for the default treatment of tax withholding as being received evenly throughout the year, this is in the instructions for Form 2210 as VolvoGirl said.  It's not just an IRS rule but is mandated by statute, section 6654(g) of the tax code:  https://www.law.cornell.edu/uscode/text/26/6654#g

[Lani6]

Yes, when I said the RMD will more than cover the tax due, I meant there is enough total RMD (1) to have a sufficient amount withheld from the RMD to cover the total tax due on all income (not just the tax on the RMD), and (2) there will still be an excess RMD amount above the total tax due to be distributed as well. 

You say, "I think the withholding is like withholding from your paychecks...." I understand that seems to be the interpretation from the various articles and comments, but I would feel more comfortable if there was a reference, like a regulation or Revenue Ruling, for this "special IRS rule" that specifically refers to RMD"s.  I find no specific reference to the handling of RMD's on the 2210 or Instructions. Maybe someday we'll find it, but I have seen nothing yet that 

But again, thank you for your help, and wanting to ensure I understood the distinction re withholding and the RMD. The intention is to have an amount withheld from the RMD equal to 110% of last year's taxes, and the remainder would be distributed to us.