Estimated Income Taxes

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sport
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Estimated Income Taxes

Post by sport »

For those who file estimated tax payments, don't forget they are due by January 15.

Uncle Sam wants his money! :(

Jeff
chaz
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Post by chaz »

Mailed mine yesterday - not good to be late.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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Mel Lindauer
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Estimated Taxes

Post by Mel Lindauer »

Got mine all ready to mail on the 15th (time value of money, you know!).

Regards,

Mel
Gill
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Last one!

Post by Gill »

Unless the law changes, January 15th should be my last estimated payment ever. I'm part of Mel's "Class of '38" who begin RMD's this year and my future tax payments will be a single amount withheld from my RMD every December.

Bruce
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Mel Lindauer
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Re: Last one!

Post by Mel Lindauer »

MBMiner wrote:Unless the law changes, January 15th should be my last estimated payment ever. I'm part of Mel's "Class of '38" who begin RMD's this year and my future tax payments will be a single amount withheld from my RMD every December.

Bruce
Hi Bruce:

Last for me, too, for the same reason (I'll have it all taken out of my RMD late in the year.)

Regards,

Mel
Class of '38
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artthomp
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RMDS withholding

Post by artthomp »

Depending upon when you take the RMDS amount you might want to still do estimated taxes instead of withholding taxes from the RMDS amount. However, obviously if you take it at the end of the year withholding makes the most sense.

I would like to use some of the amount throughout the year for travel and some living expenses reinvesting the rest in a taxable equity account (at least at first).

I'm in the class of '40 so I will still get full deferment for another 2 years but I'm considering taking the RMDS amount in January, withholding nothing, and reserving the taxes due in a Vanguard MM account so I earn interest while paying the estimated taxes when due.

I'm also considering changing my pension setup to not withhold taxes from my pension and reserving the amount required in the Vanguard MM account so I earn interest while paying those estimated taxes when due.

I guess it's purely a matter of personal preference.
Art
Chip
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Post by Chip »

Mel & Bruce,

That's a very clever strategy, which I'll have to remember when I get to RMD age. I used to do something similar with paycheck withholding (i.e. withholding the entire December paycheck).

For those who didn't catch the nuance, the Feds treat estimated tax payments differently from withholding for the purposes of underpayment penalty calculations. Withholding is considered to be evenly spread over the tax year, no matter when it is withheld. So withholding 12K in December is treated the same as 1K per month, spread over the year. But estimated payments don't get this favorable "spreading" treatment.

So, as an example, assume your RMD is 60K, you want that money in January, and you estimate your federal taxes on the RMD at 6K. If you take the 60K without withholding, you'll basically have to pay 1.5K each quarter to avoid penalties.

But (if I understand it correctly) Bruce & Mel's alternative would be to take 54K in January, with no withholding, then take another 6K distribution in December, withholding all of it. No penalties, and some time value of money gained on the 6K.

Looking it over, I might have read too much into what Bruce & Mel or doing, but this seems like an interesting possibility.
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LH2004
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Post by LH2004 »

You're not "gaining" time value of money, you're just moving it from your IRA to yourself, increasing your tax burden. Why the heck would you want to do that?
Chip
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Post by Chip »

LH2004 wrote:You're not "gaining" time value of money, you're just moving it from your IRA to yourself, increasing your tax burden. Why the heck would you want to do that?
It's an RMD, so the tax burden is a given -- there's no escaping it. My going in assumption was that the money was desired in January. If that's the case, wouldn't it be preferable to pay the taxes in December vs. quarterly?
Gill
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Post by Gill »

I try to get the most bang for my buck in two ways. By taking the withdrawal in December, I'm allowing the RMD to accumulate in the tax deferred environment for the maximum period of time. Secondly, I am paying my income taxes from this distribution as late as possible, again allowing the tax money to sit in the IRA's tax deferred environment until distribution is required.

I don't see the advantage to making the withdrawal in January and paying taxes on the income earned during the year. Why not let it continue to earn within the IRA?
Bruce
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Mel Lindauer
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Post by Mel Lindauer »

MBMiner wrote:I try to get the most bang for my buck in two ways. By taking the withdrawal in December, I'm allowing the RMD to accumulate in the tax deferred environment for the maximum period of time. Secondly, I am paying my income taxes from this distribution as late as possible, again allowing the tax money to sit in the IRA's tax deferred environment until distribution is required.

I don't see the advantage to making the withdrawal in January and paying taxes on the income earned during the year. Why not let it continue to earn within the IRA?
Bruce
For Clarification:
Like Bruce, I'm planning to take my RMD and have the tax withheld late in the year (probably in Dec.). This keep the RMD (including the taxes) tax-deferred for nearly an additional year, since I don't need the money for current living expenses. I'll eventually just be re-investing it in my taxable account.

Regards,

Mel
Chip
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Post by Chip »

MBMiner wrote:I don't see the advantage to making the withdrawal in January and paying taxes on the income earned during the year. Why not let it continue to earn within the IRA?
The only reason to withdraw in January is if one needed the money to live on. I tried (but obviously failed) to make that clear in the example I gave.
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Mel Lindauer
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RMD Strategies

Post by Mel Lindauer »

Chip wrote:
MBMiner wrote:I don't see the advantage to making the withdrawal in January and paying taxes on the income earned during the year. Why not let it continue to earn within the IRA?
The only reason to withdraw in January is if one needed the money to live on. I tried (but obviously failed) to make that clear in the example I gave.
Hi Chip:

I understood that your strategy for the Jan. withdrawal with the tax withdrawal in Dec. was for those who needed the money for current living expenses. Fortunately, that's not the case for me (and perhaps others), so I can let the money ride, tax-deferred, for basically another year. Some folks might even take monthly or quarterly withdrawls, if that works for them. Lots of different ways to skin the RMD cat.

Regards,

Mel
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Karl
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Post by Karl »

I could do that RMD withholding thing too with my inherited IRAs. Never thought about trying that one before.
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LH2004
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Post by LH2004 »

Chip wrote:
LH2004 wrote:You're not "gaining" time value of money, you're just moving it from your IRA to yourself, increasing your tax burden. Why the heck would you want to do that?
It's an RMD, so the tax burden is a given -- there's no escaping it. My going in assumption was that the money was desired in January. If that's the case, wouldn't it be preferable to pay the taxes in December vs. quarterly?
Yes, you want to pay the tax as late as possible, but you also should want to take the RMD as late as possible, keeping as much as possible of the investment earnings in the IRA and as little as possible taxable. If you NEED the money earlier in the year, the best solution is to take it as you need it with no withholding (whether it is above or below the RMD) and to take a withdrawal at the end of the year with exactly enough withholding to meet the safe harbor to avoid estimated tax; if you don't need the money, you're best off taking the entire RMD at the end of the year.
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joe8d
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Post by joe8d »

Thanks for that tax tip.I'll keep that in mind when I hit RMD's a few years down the road.
All the Best, | Joe
AlanK
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Estimated taxes

Post by AlanK »

Instead of mailing your estimated tax, you might want to use the Electronic Federal Tax Payment System (EFTPS). Several days before the tax is due I have money transferred from my Vanguard Prime Money Market fund to my bank. I also instruct EFTPS to withdraw money from my bank on a specific date. For example, I had EFTPS withdraw money on 1/10/08 for my 1/15/08 estimated tax.

The service is free and easy to set up and use. Several years ago I had a bad experience with the U.S. Postal Service. It failed to deliver a check paying a bill. That was when I started paying bills electronically. This keeps the postal service out of the loop.

I think you can set this up by going to the EFTPS web cite. That should be www.EFTPS.com.
Gill
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10th?

Post by Gill »

I use this as well for estimated payments, but why do you have it charged five days early? Mine are all charged to my account of the due date of the 15th, or sometimes a day or two later if on a weekend.
Bruce
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