Estimated tax payment

[ArchesNationalPark]

Newly retired so new to estimated taxes. Married filing joint. Going to send husband's 2023 RMD to the fed for 2023 taxes before year end. After making some QCD's, the remaining RMD will cover an estimated 50% of the fed taxes owed.   Didn't send estimated for Q1 or Q2 as the amt owed based on income and dividends was so low. Trying to figure out how much to send for Q3.

• We anticipate half as much on 2023 Schedule A due to lower medical expenses (thankfully) so will owe more tax, but is it correct that for safe harbor, we only need to send estimated payments equal to what we owed last yr plus 10% in advance, even if we suspect we will owe more due to lower schedule A?
•  Over half of our "income" for 2023 will be from a Trad IRA to Roth conversion--the max we can convert on top of our Social Security without triggering IIRMA.  This conversion will probably take place in Q4. Since this is not realized income as of Q3, is it correct that we don't need to send in any estimated tax for it in Q3?  
• Is it reasonable and correct to send the amount  for Q3 that, when added to the RMD amount, would equal 3/4 of the safe harbor amount?  Example using dummy numbers:  If safe harbor is $20k, RMD is $10k.  3/4 of $20k is $15k, less $10k from RMD so send $5K for Q3??  And then send last 1/4 of safe harbor amt on Jan 15?  Or something different because over half of the "income" will be in Q4 from the Trad to Roth, or for some other reason? 
• Also, saw something that we don't need to make Q4 estimated in Jan if we pay  taxes on time in April. Is that right?  With the large amt of income from the Trad to Roth conversion in Q4, wouldn't they want the money sooner?
• Note: seems hard to have TT calculate amt owed bc there are so many differences since last year and also a lot of unknowns for the rest of the year. . 

Thank you so much for any answers!

[Bsch4477]

Income from your IRA distribution is considered by the IRS to have been withdrawn quarterly equally throughout the year so if that is most of your income you don’t have to worry about estimated payments. Just be sure that your amount withheld is at least as much as last year’s tax liability. 

[ArchesNationalPark]

Thanks for your reply.  The RMD will only cover about half of anticipated fed tax due, so how much do we send for Q3, given that we didn't send any for Q1 or 2 as we thought at that time the RMD would cover most of it. 

[fanfare]

By default, Form 2210 requires evenly spread installments.
you missed two quarterly payments, so this might not be satisfied.

Your withholding will help.

See Form 2210 for options that may reduce or eliminate your penalty such as-

• Check Box D and file Form 2210.
• Use Schedule AI.

I do a trial tax return with current tax software entering the withholding and estimated tax I expect, to find out what my penalty, if any, will be.

Scheduke AI is complex and difficult to deal with.

@ArchesNationalPark 

[Mike9241]

if your adjusted gross income for 2022 was over $150,000, then the safe harbor is that 110% of your 2022 tax, otherwise it's 100%, must be paid in through withholding and estimated tax payments. Generally, the law requires that 1/4 of this number be paid in each quarter 4/15/,6/15,9/15 1/15 of following year.  if not, then to avoid or reduce penalties for underpayment in the earlier quarters you must compute your taxes for each quarter using the annualized income installment method. see form 2210 page 3.   https://www.irs.gov/pub/irs-pdf/f2210.pdf    the law gives you the option of treating withholding as if 1/4 was paid in for each quarter regardless of when actually withheld. there is also the option to use the actual amount withheld in each quarter. 

"Also, saw something that we don't need to make Q4 estimated in Jan if we pay taxes on time in April. Is that right" No to skip the 1/15 estimate the return must be filed and balance paid by 1/31/2024

[NCperson]

@fanfare - shouldn't the OP check Box C?  Box D is for lumpy withholdings (not estimates) and Box C is for lumpy income (which is what the OP stated).

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

Agree the form is a headache, but in this case it would be appropriate to complete.

@ArchesNationalPark - as long as you pay 90% of THIS YEARS liability by January 15 (since you are doing the RMD in December) AND complete Form 2210 (some of it will pre-populate by TT) you should be fine and avoid any interest penalties.  The safe harbor is the LOWER of 100% of last year or 90% of this year.  

[dmertz]

To avoid needing to complete Schedule AI of Form 2210 (if doing so would be required to avoid a quarterly underpayment for earlier quarters), you could consider manufacturing tax withholding which would apply to earlier quarters by, before the end of 2023, having your husband obtain distributions totaling more than the RMD so that enough can be withheld to cover the entire tax liability, then using other funds to complete the rollover of the amount distributed in excess of the RMD.  If the RMD is from an IRA, rolling the funds back into a traditional IRA would be subject to the one-rollover-per-12-months limitation.

[ArchesNationalPark]

Hello dmertz!  I am curious about this option but not sure I understand it. Are you saying that in addition to having the required RMD from my husband's Trad IRA sent to the fed (this will cover abt half of what's owed), also send directly from his Trad IRA the other half owed?  Would the non-RMD part also be considered to be spread thru the whole year? Would we send it all together or separately at year end or some sooner?

The conversion from Trad to Roth that we plan for year end is completely separate as that's my account and I'm not required to take RMDs yet. 

Can you elaborate what you mean about rolling $ back into Trad IRA?  I get the part about there being one such transaction per 12 mo, but what would be rolling back and why? Thank you so much for the info. 

And thanks to everyone who posted answers. They are all helpful and I'm going to look into these forms today. 

[Critter-3]

Ok ... any withholding from an IRA  is considered happening ratably thru out the entire year even if it happens on 12/31  so  just have the IRA do withholdings to cover any estimated payments needed.  If there will be a short fall then make an estimate payment as needed.  

[NCperson]

@Critter-3 yeah, but on the otherhand most all financial planners would say that if you are going to do Roth Conversions, use after tax money from outside the IRA to pay the tax.  That way the OP takes full advantage of the tax free growth that occurs within the Roth. 

You can always take the money of the Roth if needed at a later date (and there is no possiblity of tax as long as the Roth has been opened for 5 years and the taxpayer is at least 59.5 years old)

@ArchesNationalPark 

[Critter-3]

The OP mentioned the conversion & an IRA  RMD so withholdings should be from the non conversion situation. 

[dmertz]

Let me provide an example.  Let's say the QCD you want to make is is $5k, the RMD is $10k and to avoid an underpayment penalty without annualizing income on Schedule AI you need to make up a tax-payment deficiency of $20k after figuring in your Roth conversion.  Your husband could make a distribution of $10k with $5k being QCD and the other $5k withheld for taxes.  Assuming that you plan to convert more than $15k, you could then take a distribution paid to you from your traditional retirement account equal to the amount that you intend to convert to Roth, have $15k of that distribution withheld for taxes, replace that $15k with other funds, then indirectly convert to Roth within 60 days the entire amount distributed from your traditional retirement account.  Because conversions to Roth are disregarded with respect to the one-per-12-months rollover limitation, you avoid any involvement with that limitation.  The amount withheld between the two distributions will be $20k, the intended QCD will be made, the RMD will be satisfied and you will have converted to Roth the intended amount with nothing left over.

The amount withheld for taxes (but not estimated tax payments) is subtracted from your tax liability before the remainder of your tax liability is divided among the four tax quarters .  Estimated tax payments are then applied to the corresponding tax quarters to see if you have any quarterly underpayment.  The effect is that tax withholding at any time during the year is divided among the four tax quarters, so tax withholding late in the year can make up for underpayment early in the year while estimated tax payments cannot.

[ArchesNationalPark]

Hi dmertz!  Thank you for the additional information.  I'm following the first part of what you are saying and it sounds good and doable, but would still appreciate a little more clarification. I plan to convert around $50k to Roth. 

"... you could then take a distribution paid to you (so $35k paid directly to me and not converted to Roth and using your example numbers, $15k withheld for taxes?) from your traditional retirement account equal to the amount that you intend to convert to Roth, have $15k of that distribution withheld for taxes, replace that $15k with other funds (non-IRA funds?  where do I replace it to?), then indirectly (what does this mean?  how? ) convert to Roth within 60 days the entire amount distributed from your traditional retirement account.  Note, I have already contributed the max to a Roth this yr from part-time work. Does this preclude this method?  Sorry if too many questions. Thank you so much for your help!

[NCperson]

@ArchesNationalPark let me help (a little)

a "CONTRIBTION" to a ROTH is limited as you are aware; it is after-tax money that you decide to contribute to a ROTH; it is NOT coming from a TRAD IRA (except backdoor, but let's not go there). 

a "CONVERSION" to a ROTH is coming from a Trad IRA and is not limited (other than by the balance of the TRAD!)

The IRS purposely used those two words related to IRAs because they have different meanings. 

most financial advisors suggest that to maximize the value of the Roth CONVERSION, that the tax required to pay on the conversion come from money outside the IRAs ("non-IRA funds"), i.e. other investments you may have.  Yes, you can certainly, for example, Covert $10,000 from a TRAD IRA, put $8,000 into the ROTH and use the remaining $2,000 to pay the tax, but financial advisors would encourage coverting the entire $10,000 to the ROth and then finding the $2,000 from other investments that are not in the IRAs - if you can swing it that way. 

pleasea read @dmertz comments again 😉

[dmertz]

A Roth conversion is defined as a distribution from a traditional IRA and a taxable rollover to a Roth IRA.    It doesn't matter if the cash is paid directly from the traditional IRA to the Roth IRA or indirectly by paying the cash to you which you then deposit yourself into the Roth IRA, the taxable result is the same.   When doing it indirectly you have to make sure that the Roth IRA custodian knows that the deposit is a Roth conversion, not a regular contribution.  The custodian's deposit forms will have a way to indicate that the deposit is a Roth conversion and not a regular contribution.

Money is fungible (one dollar can be substituted for any other dollar), so the dollars from the distribution that go to tax withholding are the same as any dollar you have in your pocket (except that the withholding is dollars held to your credit by the IRS instead of being in your pocket).   By substituting other dollars (the dollars that you might have instead sent to the IRS as an estimated tax payment) for the ones being held by the IRS, you have the necessary cash to deposit into a Roth IRA as a Roth conversion to complete the conversion of the entire gross amount distributed.

If the process confuses you, it might be easier to make an estimated tax payment and complete Schedule AI if necessary, but Schedule AI is still not easy.  I've had to do Schedule AI in the past to avoid a tax penalty due to income received late in the year and it more than doubled the amount of time that it took to prepare my tax return.