Estimated tax payment

[ArchesNationalPark]

dmertz-Thank you so much for this further clarification. I see what you are saying and now  understand how to do it.  I have looked at Schedule A1. It seems time consuming and tedious but not complex. I have/will have the needed data and can definitely do it if needed.  Just hate having to spend that much time, probably two full days to do it. 

In any case, it is very helpful to know all the options available for getting the right amount into the fed's coffers at the right time and in the right manner (withholding vs est tax) so I can pick the best one for this year's situation. 

[ArchesNationalPark]

Thank you NCperson!  Thanks for the info that using IRA money to pay taxes due on a Trad to Roth conversion is less financially beneficial.  I have made several Trad to Roth conversions in prior years when our income was low and again last year. So far, always paid the tax w non-IRA $ for this exact reason. Hope to this year as well! 

To Anyone:

• Do I have it correct that regardless of whether you pay estimated taxes in four equal quarters or use the annualized plan (Schedule A1), that the total amount paid will be the same. (basically the difference between the four equal quarters and annual plans is that one has the same payment each Q and the other varies based on actual quarterly data)?
• Also is it true that estimated taxes due for current year are based solely on prior year data, not what you are actually getting during the current year (much more, much less income, deductions)?   

Thank you to EVERYONE who has responded. Greatly appreciate all the help and info shared. I feel ready to make decisions and move fw for 2023 and, hopefully, for changing situations in years to come. 

[NCperson]

@ArchesNationalPark 

bullet one - yes, the total will be the same.  and that is because Total tax - estimated payments - withholdings = refund / still owe on April 15. 

bullet 2 - not true.  Very simply and generally, there is no penalty interest as long as the estimates + withholding equals 100% of last year's tax liability (or 110% for high income earners) or 90% of this years tax liability, whichever is lower,  OR the amount due on April 15 is less than $1000.  

So for example, last year the tax paid was $20,000 and this year's tax estimate is $30,000.   There is no interest penalty as long as the estimated payments and withholdings are the lesser of $20,000 (100% of last year) or $27,000 (90% of this year), OR the amount due on April 15 less than $1000. .   So as long as the withholdings and estimates are at least $27,000, there is no interest due. 

But the IRS wants that calculation completed quarterly! which is the headache of Form 2210 and 2210ai!

look at the flow chart on the top of the form: 

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

(if you decide to play with the form, you are going to check Box C in Part II)

[mikewinnick1]

I take out my full RMD (for wife and I) in the first week of January. In past years I made estimated payments of 25% of what I knew my taxes would be plus a buffer. So If my taxes were going to be $20,000, I would make estimated payments of $5,100 and have the $400 excess applied to the next year.

But this year my RMD total is very big and I'm concerned with being told I paid too little each quarter. My RMD makes up 70% of my AGI. Can I still make estimated payments of 25% of my estimated annual tax and be OK? My estimated payments will exceed my actual tax by over $500.

I can know my taxes accurately because I have no investments outside of my IRA's and Roth's and any cash that might generate interest in my Brokerage account is not enough to matter.

Thanks.

[Bsch4477]

If your RMD is almost all of your income you are in luck since the withholding from that distribution is considered to have been paid quarterly. For that reason many tax payers withhold the entire tax estimated to be due late in December of the tax year. 

[mikewinnick1]

Just to be clear on this, are you saying that I can wait until December to pay my required estimated (or actual) tax due because the IRS will consider that it was paid out evenly every month or quarter of the year? Remember, when I take my RMD in January I do not have anything withheld, I get all the cash, move it too my Brokerage accounts and other than my quarterly estimated payments I live on it , pension income and Social Security incomes. You're saying that I can take my full RMD on January 1st and pay the full 2024 taxes on December 30th, with no adverse effect?

[Bsch4477]

 Tax withheld on retirement income is considered to have been paid quarterly throughout the year. It works better to take all or most of your RMD near the end of the year when you have a good estimate of your tax liability. Then withhold your tax liability from your last RMD withdrawal. I believe it is the tax withheld from the retirement account that is considered paid quarterly. Estimated payments separate from what is withheld from your RMD might not count. If you depend on your retirement income during the year to the extent that your tax liability can’t be satisfied through your RMD near the end of the year this might not work for you. 

[mikewinnick1]

I guess unfortunately what you said makes sense. I've still go do do more research before the April 15th due date, but it looks like if I take and RMD in the 1st quarter (or any quarter) the IRS wants it's estimated tax on that amount to be sent in that same quarter. So taking the whole RMD in January means I either pay the big tax hit in the 4/15 payment, or have Fidelity take out withholding and send me what's left.

Thanks.

[dmertz]

I would say it's generally better to take RMDs early in the year rather than late in the year, but if you do so you won't be able to use annualization of income to reduce any underpayment penalty.  Instead you'll need to pay estimated taxes equally for each of the first three tax quarters based on 100% (or 110% for those with higher AGI) of the previous year's tax liability or 90% of the current-year projected tax liability, then possibly adjusting the Q4 estimated tax payment if necessary to avoid overpayment or underpayment.

[mikewinnick1]

Good answer and coincidentally I sort of lucked out this year. I'll explain but first,  my estimated payment process has always been a large payment in April, an equal or smaller one in June, another equal or smaller one in September and then a final payment in January if I was short some amount. So, if my taxes were going to be $16,000 I would pay $8,000 in April, $4000 in June and $4,000 again in September. I did this because I always wanted to owe less money later in the year and since I had plenty due to taking my RMD in January it did not hurt me to make a bigger payment up front.

Now, this year I realized I lucked out. My wife just started her RMD in 2024. So our taxes, and the estimated payments ballooned. But my 2023 taxes  that I'm going to file in April were less than half of what the 2024 will be. I intend to pay my first estimated payment for 2024  110% of the 2023 tax amount in April, then two equal but lower payments in June and September. That will result in all my 2024 taxes being paid as well as 110% of what my 2023 was. My hunch is that I am in no risk of any penalty no matter what happens, though as I've noted before my estimated tax is pretty precise and in any case I always overpay a few hundred that gets applied to the next year,

Sound good?

[JohnB5677]

Your hunch is probably correct, but we should make sure.

I'll use your $16,000 example:

• You said you intend to pay my first estimated payment for 2024  (110% of the 2023 tax ) amount in April.
  • Does this mean that you are going to prepare a check for 10% of your 2023 tax due ($1,600) plus an additional double the amount that you estimate each year ($8,000)?
  • Total payment $9,900
• Then two equal but lower payments in June and September.
  • Is this your regular estimated tax referred to above?
  • Two $4,000 payments.
• And for good measure you overpay a few hundred that gets applied to the next year,

You could spread it equally over 4 quarters, but that does sound like a solid plan.

[mikewinnick1]

First, I just rechecked my AGI for 2023 and it's below the $150,000 trigger that sets the Safe Harbor trigger at 110%. So I just need to pay 100% of last years taxes this year to be safe.

I use the IRS online payment site for all my estimated payments. Let's assume my 2023 tax that I've paid in estimated payments all last year was $16,000. So I'll log on and tell them to ACH my 2024 April estimated payment on the 15th and to take $16,000. Since 2023's tax was $16,000 that will be 100% and after April I will have paid my Safe Harbor amount. Then, since my total 2024 tax (which I'll pay in 2025) is, let's say $40,000 I will have to pay the other $24,000 by Y/E 2024 (Jan 2025). I will make three estimated payments of $10,000 (6/15), $10,000 (9/15) and $5000 (1/15/25). Things will change in 2025.

In the past I paid estimated taxes at around 40%, on the first and 20% each after. Sometimes when they were low I just paid the total by the September payment. But now that my RMD's are growing as I age I'll go back to 4 payments. And, starting in 2025 I'll probably look to just having my pension, Social Security and RMD payers take out withholding to simplify life, though I'll probably set the actual amounts myself so I don't come up short.

[DianeW777]

Yes, if you are below the 110% trigger for 2024, then you can pay 100% of what your tax liability is for 2023 (line 24, form 1040). I usually suggest adding $1 to that amount.

If  you choose to pay your full amount on April 15th, you are saved from any penalties since you are paying it all on the first quarter. You could actually wait to pay when you file if your numbers are all good.  There would not be any penalty for waiting until you file.  So in your example, you really don't have to pay until April 15, 2025 for any balance on your 2024 tax return and still be penalty free:

• Then, since my total 2024 tax (which I'll pay in 2025) is, let's say $40,000 I will have to pay the other $24,000 by Y/E 2024 (Jan 2025).

You can do what is most comfortable for you.  Certainly you can file a 2024 Form W-4P to have withholding from your required minimum distributions (RMD)  which would lower your estimated tax payments.

@mikewinnick1