Lump sum RMD and Colorado state tax payment

[WDM67]

For 2024 taxes, I made a single distribution (withdrawal) from my IRA. The brokerage took out estimated federal tax (that's good), but did not take out estimated Colorado tax, so I was hit with a penalty. As I am just now finding out, Colorado requires quarterly estimated tax payments for a lump sum IRA withdrawal, or the use of a "Schedule AI (annualized Income) of form 2210. 

For 2025, will be doing another significant distribution from the IRA (starting RMDs soon) and do not want to incur another penalty. My question is how to document, within TurboTax, the necessary forms (federal and state) if making a single IRA distribution and single estimated state tax payment, and not quarterly type transactions.

To clarify, my income in 2025 will be primarily from Social Security, and distributions from my IRA. Will using Schedule AI have any effect on my federal taxes as well?

Thx

[WDM67]

Bump. 😁

[JotikaT2]

Yes, you can prepare the Colorado estimates within TurboTax.  

To do this, log back into your TurboTax product and navigate to the state interview screens.

When you see the screen titled "A few things before we wrap up your state taxes" select Start to the right of Make Estimated Payments for Next Year.

Then, proceed to follow the questions in the interview screens to generate your estimated tax payments for Colorado based upon your anticipated increase in income.  

Tax should be paid as income is earned.  You can choose to annualize your income if you anticipate your extra income will be distributed during the last quarter of the year.  This would potentially reduce any underpayment penalty.

If you prefer, you can also prepare your 2025 Colorado estimates directly through the Colorado Department of Revenue website.

[WDM67]

JotikaT2,

Thank you for the reply, but perhaps I wasn't clear. Here's the situation: For 2025, I intend to make a large IRA withdrawal. For example, let's consider a $50,000 IRA withdrawal.  Through my brokerage, they will withhold my federal taxes, reported on my 1099 form. I enter this information into TurboTax, and all is good for the federal tax.

For Colorado state tax on $50,000, I will need to pay Colorado at least 4.4%, or $2,200.  The brokerage does not withhold any state tax, so I will need to make the state tax payment directly, in that quarter. For 2025, it will be either 3rd or 4th quarter. I can do that.

Now the question: within TurboTax, how do I document for Colorado that the IRA withdrawal was made in a single quarter, and that I would have paid the estimated Colorado tax in that quarter?

I cannot annuitize 2025 Colorado estimated tax payments as two quarters have already passed.

Am just looking at how to use TurboTax to designate the IRA withdrawal and associated Colorado tax payment in a single quarter, to avoid future penalties.

Thank you.

[Hal_Al · Accepted solution]

Q. To clarify, my income in 2025 will be primarily from Social Security, and distributions from my IRA. Will using Schedule AI have any effect on my federal taxes as well?

A. Simple answer: No.  The feds have a separate, but similar form 2210. But it's not needed in your case.

Withholding is not the same as estimated payments.  In particular, federal withholding is treated as having been paid evenly throughout the year. So, when you have federal income tax withheld from your lump sum IRA distribution, your are protected from a potential underpayment penalty. 

I'm am no specifically familiar with CO rules, but some  states do not have a similar rule.  A quick reading of the CO rules (https://tax.colorado.gov/individual-income-tax-guide) seems to indicate that CO does not.

But, if you have the IRA administrator withhold CO tax, at the time of the distribution, the "annualized income" rules  should protect you from the underpayment penalty, even if you didn't do quarterly payments. At the time you file your taxes, TurboTax (TT) will prepare Schedule AI (annualized Income) of form 2210 to claim the penalty exception.  It is not automatic. You will be asked at the "Other tax situations" section of the program, if you want to file that form. 

[WDM67]

Hal_Al, thank you. This is what I was missing:

At the time you file your taxes, TurboTax (TT) will prepare Schedule AI (annualized Income) of form 2210 to claim the penalty exception.  It is not automatic. You will be asked at the "Other tax situations" section of the program, if you want to file that form. 

I had not looked at that option in TT before.

Will using Schedule AI have any effect on my federal taxes as well?

A. Simple answer: No. 

Good. That helps clarify things as well.