I will have paid no estimated tax in the first 3 quarters but I keep seeing that I have to make 4 equal payments.
current tax year is 2022.
by default the underpayment of estimated tax penalty is computed assuming 1/4 of your tax is due each quarter (really first 3 month, then 5 months then 8 months finally the whole year.) the only way to get around this is to use the annualized installment method for the first 3 quarters. the 4th is automatic because that info comes from your return
You will not be penalized for only making a 4th quarter payment if your underpayment is due to income received (Roth conversion) in the 4th quarter. However, you will have to complete Part III of Form 2210 - Penalty Computation when you file your tax returns. You also may qualify for the "safe harbor" if you pay 100% of the tax you owed for the previous tax year, or 110% if your previous year’s Adjusted Gross Income is over $150,000 (over $75,000 if you are married filing separately).
OK, Mike. Thanks. I am talking about 2023 tax year.
I guess I can't make a conversion in the 4th quarter of 2023, then, without estimated-tax penalty, since the end of the first quarter has already passed. Fair statement? Said another way. I need to make a conversion decision (will I do it and how much) in the first quarter in order to avoid a penalty? So much for pay-as-you-go, per IRS.
Yes, it applies to all years. The best way to avoid the penalty all together is to make sure you pay in at least as much as your tax was for 2022. If you know you will make approximately the same income that's an easy method. If not, as indicated you can use the annualized income method to avoid late payment next year if most of your income is in the last quarter. See the link below for reasons a penalty could be eliminated.