Estimated Taxes in the following year after an IRA to Roth conversion

[Matt18]

My income jumped because of a IRA to Roth conversion. When calculating the safe harbor estimated taxes for next year, does the IRS allow me to not include the Roth conversion amount  as part of my safe harbor estimate?

If the recommendation is to not do a safe harbor estimate but to do an estimate on actual income, the way to calculate estimated taxes is to use the tax rate chart based on tax bracket (e.g. 24% for income between $89k - 170k).  But most of my income is complicated. I have dividend income and a small business that has deductions.  Do I basically have to do a complete tax return every quarter to figure out my taxes?

Does Turbo Tax CD help with the quarterly payments through out the year?

[JohnB5677]

My income jumped because of a IRA to Roth conversion. When calculating the safe harbor estimated taxes for next year, does the IRS allow me to not include the Roth conversion amount as part of my safe harbor estimate?

• Yes, you do not have to include the ROTH conversion amount.  
• However, you will not qualify for the safe harbor option of "The amount you paid during the tax year did not equal 100%, (110% for higher incomes) of your taxes owed the prior year."

If the recommendation is to not do a safe harbor estimate but to do an estimate on actual income, the way to calculate estimated taxes is to use the tax rate chart based on tax bracket (e.g. 24% for income between $89k - 170k).  But most of my income is complicated. I have dividend income and a small business that has deductions.  Do I basically have to do a complete tax return every quarter to figure out my taxes?

• You do not have to deal with the tax tables.  You simply enter all of your income estimates.  There are separate areas for business, dividends etc.
• You do not have to prepare the vouchers quarterly.  All four will be printed with your tax return.

Does Turbo Tax CD help with the quarterly payments throughout the year?

• TurboTax will prepare your vouchers; however, you will have to keep track of them and make the payments yourself.

The underpayment penalty may apply if any of these apply:

• The amount of tax you paid during the tax year is less than 90% of the tax that you owed for the current year. 
• The amount you paid during the tax year did not equal 100%, (110% for higher incomes) of your taxes owed the prior year. 
• The IRS also says you can probably avoid the penalty if the amount you owe is less than $1,000, after subtracting withholding and refundable credits.

How do I prepare Estimated Taxes.

 Quarterly payment due dates 

[Matt18]

Thanks JohnB5677.  Let me make sure I understand your answer. Are you saying when calculating my safe harbor tax estimates for next year, I can base it on what my taxes would have been this year without the IRA to Roth converston?

For example using simple numbers,  let's say my income was $100 and my Roth conversion added another $150 to my income bringing my AGI to $250.  And say my taxes in 2022 on the $250 is $50.  Then my estimated taxes for 2023 would be $22   ($50/$250 * $100 * 1.1%)? 

[LindaS5247]

In general, you may have to pay taxes on the conversion either at the time of conversion or as estimated tax payments during the tax year of the conversion. It is not wise to wait until the tax deadline for the year to pay the taxes because you may incur penalties.

The safest option to avoid an underpayment penalty is to aim for "100 percent of your previous year's taxes." If your previous year's adjusted gross income was more than $150,000 (or $75,000 for those who are married and filing separate returns last year), you will have to pay in 110 percent of your previous year's taxes to satisfy the "safe-harbor" requirement. If you satisfy this test, you won't have to pay an estimated tax penalty, no matter how much tax you owe with your tax return.

If you normally pay estimated taxes (self-employed) or either don’t pay the tax at conversion or through withholdings, you most likely need to pay the tax throughout the year in quarterly estimated tax payments. It’s possible you’ll have to pay a penalty if you don’t make estimated tax payments to cover some or all of the tax you’ll owe on a conversion from a regular IRA to a Roth IRA. 

You’ll need to determine the tax payments and pay them by the payment deadline for each quarter. For more information about filing estimated taxes, see Form 1040ES, which also includes an estimated tax worksheet and the forms for filing quarterly estimated taxes.

The estimated tax payment is based on an estimation of your income for the current year. As such, it is possible to underestimate, resulting in an underpayment and penalty. To avoid this penalty, you can use your previous year’s taxes as a guide. In many cases, as long as you pay 100 percent of the previous year's tax, you won’t be subject to the penalty. If you end up overpaying, you can receive a tax refund at the end of the year or carryover the excess amount to help pay the estimated taxes for the next year.

You need to come up with a good estimate of the income and deductions you will report on your federal tax return. You can use TurboTax tax preparation software to do the calculations for you, or get a copy of the worksheet accompanying Form 1040-ES and work your way through it.

Click here for Form 1040-ES.

Click here for Pub 505," Tax Withholding and Estimated Tax"

TurboTax does calculate this and provides you with the printed 1040-ES Forms.

Consider speaking with a Live Agent for additional help.  Click here for information on Turbo Tax Support.
 

Click here for additional information on Form 1040ES for individuals.
Click here for information on "Estimated taxes and how to determine what to pay and when".

Click here for information on why 1040-ES estimated tax vouchers paid out.

[Matt18]

Thanks LindaS5247.   It's really hard for me to estimate my income, so I prefer to do the safe harbor estimate. But with the Roth conversion, my safe harbor estimate will likely be 3x over what my actual taxes will be.  

Is there a way to do the safe harbor estimate without including Roth conversion income tax?

[sandy4042]

@Matt18  I've been doing Roth conversions for the past three years and had variable income, so I hear what you're saying.  I do estimated tax payments for the first three quarters, not including Roth conversion, do my Roth conversion in the last quarter, then my last quarterly payment on Jan 15th includes taxes for the Roth conversion.  I do file Form 2210 to avoid a penalty.  Safe harbor strategy wouldn't work for me because I don't know for certain how much or if I'm going to do a Roth conversion until the end of the calendar year.  One Turbotax tool that has proven invaluable to me in calculating my quarterly estimates is the What-if worksheet, it's available with the CD version.  Whenever a quarterly estimate deadline comes up I bring up the What-if and recalculate my quarterly taxes due.  It's also helpful in playing out different scenarios with various Roth conversion amounts.

[LindaS5247 · Accepted solution]

Unfortunately, there is no real way to do the safe harbor without including the Roth IRA.

You can make your quarterly payments based on your current earnings.  

I would estimate your income as close as you can determine, even if you have to look at it quarter to quarter. That should get you close to your actual taxes due. 

This may be the best way to do it so as not to make those overly large payments.