Estimated taxes post-retirement

[fusilli45]

Hello, I retired in 2021, my income was pretty high, especially because of some retirement perks. This year I'm not working and have very little taxable income outside of Roth conversions from my former employer's IRA, and from which no income tax was withheld. The amount will keep me in the 12% tax bracket, perhaps around 100K, far lower than my 2021 taxable income. Do I need to make an estimated tax payment before year end to avoid penalty, or do I get any type of waiver because my situation is so different than it was previously? Thank you. 

[Opus 17]

Sorry, no, you don’t get a pass.  You will need to make estimated payments that equal at least 90% of the tax you owe, or 100% of last years tax liability (which was much higher so you already know that will be an overestimate).  

[Anonymous_ · Accepted solution]

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@fusilli45 wrote:

....Do I need to make an estimated tax payment before year end to avoid penalty......

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You can avoid any federal penalty for underpayment of estimated tax if your withholding plus your estimated tax payments equal or exceed 90% of your 2022 tax or your estimated tax payments equal or exceed 100% of your 2021 tax (110% if your 2021 adjusted gross income was more than $150K).

You can also avoid any federal penalty for underpayment of estimated tax if your balance due after subtracting taxes withheld from 90% of your 2022 tax is less than $1,000 or your total taxes are less than $1,000.

See https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty

[Mike9241]

Waiver of Penalty form 2210

Waiver of Penalty
If you have an underpayment, all or part of the penalty for that
underpayment will be waived if the IRS determines that:
• In 2020 or 2021, you retired after reaching age 62 or became
disabled, and your underpayment was due to reasonable cause
(and not willful neglect); or
Do the following

1. Check box A or box B in Part II, as applicable

a. If you checked box A, complete only page 1 of Form 2210 and attach it to your tax return (you aren't required to figure the amount of penalty to be waived).
b. If you checked box B, complete Form 2210 through line 18 without regard to the waiver. Enter the amount you want waived in parentheses on the dotted line next to line 19. Subtract this amount from the total penalty you figured without regard to the waiver, and enter the result on line 19 .
2. Attach Form 2210 and a statement to your return explaining the reasons you were unable to meet the estimated tax requirements and the time period for which you are requesting a waiver.  because of the statement, you may need to file by mail. 
3. If you’re requesting a waiver due to retirement or disability, attach documentation that shows your retirement date (and your age on that date) or the date you became disabled.

The IRS will review the information you provide and decide whether to grant your request for a waiver

[dmertz]

Even if your withholding plus estimated tax payments are at least 90% or within $1,000 of your tax liability for the year you could still have an underpayment penalty if the estimated tax payments were not made timely.  Underpayment is determined quarterly and, unlike tax withholding which by default is treated as having been withheld uniformly throughout the year, estimated tax payments are credited when actually paid.  If your Roth conversion was done in Q1, you likely would have needed to make a Q1 estimated tax payment by April 15 (actually April 18 for 2022) to avoid an underpayment of your Q1 tax liability.  Estimated tax payments later in the year cannot make up for an underpayment earlier in the year but would serve to reduce underpayments for the current and subsequent quarters.

If you would otherwise have an underpayment penalty for an earlier quarter, a strategy to reduce the earlier-quarter's underpayment is to manufacture tax withholding later in the year (portions of which by default will apply to each of four tax quarters).  One way to accomplish this is to take a distribution from an IRA, have a majority of it withheld for taxes, then complete a 60-day rollover of the entire gross distribution by substituting other funds.  The downside is that the distribution from and rollover back to the same type of IRA is subject to the one-rollover-per-12-months limitation.

[Opus 17]

@fusilli45 

...and lastly (maybe lastly), if you do get assessed a penalty, you can request a one-time waiver if this is the first time you have been assessed a penalty.  For that reason, if Turbotax recommends paying a penalty, decline the recommendation, and wait to see if you get a bill, because you can appeal the bill. 

If you did do the conversions earlier in the year, making an estimated payment now rather than waiting until January or April will reduce the penalty and interest owed. 

[fusilli45]

Thanks! All great answers I received, but yours was most on target to my situation - my income is much lower than in the past, and nothing will have been withheld, so my question ultimately boiled down to whether I'd somehow get a pass because of this year being so different and transitional.  At this point, I guess I'll just make an estimated payment (I can estimate pretty accurately what that should be), since it's just a matter of paying now versus a few months from now when I file.

(SORRY, I THINK I ACCIDENTALLY MARKED MY REPLY A 'BEST ANSWER' WHEN OF COURSE I REALLY MEANT THE ONE I WAS REPLYING TO. BUT THANKS EVERYONE FOR THE HELPFUL INFORMATION!!