Interpretation of IRC 6654(G)

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Topic Author
downeast
Posts: 17
Joined: Thu May 04, 2017 7:49 am

Interpretation of IRC 6654(G)

Post by downeast »

(g)Application of section in case of tax withheld on wages
(1)In general
For purposes of applying this section, the amount of the credit allowed under section 31 for the taxable year shall be deemed a payment of estimated tax, and an equal part of such amount shall be deemed paid on each due date for such taxable year, unless the taxpayer establishes the dates on which all amounts were actually withheld, in which case the amounts so withheld shall be deemed payments of estimated tax on the dates on which such amounts were actually withheld.

(2)Separate application
The taxpayer may apply paragraph (1) separately with respect to—
(A)wage withholding, and
(B)all other amounts withheld for which credit is allowed under section 31.


Does the above mean that tax withheld is considered pro-rata unless you can document something else?

I took an untaxed IRA distribution earlier this year and also received untaxed income. My plan is to do another distribution in December primarily to have Federal and state taxes withheld to avoid penalty. Alternatively, I can also cover 90% of current year taxes due by significantly increasing W-4 withholding from December expected income, or do a combination of both.

Most articles I have read agree that this strategy is fine. However, yesterday I came across a recent article that stated the following:

There is one catch to avoid. The tax code says withheld tax payments are not considered made equally on the estimated tax due dates during the year when the taxpayer determines the dates on which the money actually was withheld.

If you take periodic IRA distributions during the year and have taxes withheld each time, you shouldn’t have a problem. But suppose you have no taxes withheld during the first 11 months, then have a large amount withheld in December. The IRS then might choose to treat all the taxes as paid on the last estimated tax payment date for the year. You would owe penalties for not pre-paying evenly during the year.


The above article you can find here: https://www.retirementwatch.com/estimat ... r-retirees

So, is IRC 6654(G) subject to IRS interpretation?

Jim
MarkNYC
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Joined: Mon May 05, 2008 7:58 pm

Re: Interpretation of IRC 6654(G)

Post by MarkNYC »

downeast wrote: Sun Nov 22, 2020 8:54 am (g)Application of section in case of tax withheld on wages
(1)In general
For purposes of applying this section, the amount of the credit allowed under section 31 for the taxable year shall be deemed a payment of estimated tax, and an equal part of such amount shall be deemed paid on each due date for such taxable year, unless the taxpayer establishes the dates on which all amounts were actually withheld, in which case the amounts so withheld shall be deemed payments of estimated tax on the dates on which such amounts were actually withheld.

(2)Separate application
The taxpayer may apply paragraph (1) separately with respect to—
(A)wage withholding, and
(B)all other amounts withheld for which credit is allowed under section 31.



... However, yesterday I came across a recent article that stated the following:

If you take periodic IRA distributions during the year and have taxes withheld each time, you shouldn’t have a problem. But suppose you have no taxes withheld during the first 11 months, then have a large amount withheld in December. The IRS then might choose to treat all the taxes as paid on the last estimated tax payment date for the year. You would owe penalties for not pre-paying evenly during the year.
The author's statement above is not correct. As the code section above clearly states, the IRS will assume tax withholding is paid evenly throughout the year unless "the taxpayer" can show differently. In the reading of Sec 6654(g) it seems that the author of the articles incorrectly believes "the taxpayer" and "the IRS" are synonymous.
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neurosphere
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Re: Interpretation of IRC 6654(G)

Post by neurosphere »

I agree with MarkNYC.

But what I did not realize (having had no reason to know it, ha ha) was that one COULD choose to treat withholding as payments made during the actual period withheld, rather than evenly distributed. The situation probably doesn't come up that often, but I imagine there are situations which might limit some penalties if say, one had a W2 job early in the year and a 1099 job later in the year and didn't pay enough in estimated taxes. Better to choose to apply the withholding to the earlier quarters, I assume. Although, off the top of my head, I suspect it makes very little difference in terms of total interest owed on the shortfall.
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Topic Author
downeast
Posts: 17
Joined: Thu May 04, 2017 7:49 am

Re: Interpretation of IRC 6654(G)

Post by downeast »

I agree with you, and that appears to be the consensus across all articles I have found.

I guess the confusion comes from the statement "unless the taxpayer establishes the dates on which all amounts were actually withheld".

The author probably interpreted the word "establishes" as referring to the taxpayer deciding when tax is withheld, as opposed to meaning that the taxpayer chooses to document when tax was actually withheld. I suppose there may be circumstances where it is more favorable to the taxpayer to have the withholding fall within a given time period, as opposed to being pro-rated across the year. Obviously they can't have it treated both ways, except to the extent of W-4 wage vs other income.
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