Quarterly estimated tax if Frontloading Pre-tax retirement

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Finance-MD
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Quarterly estimated tax if Frontloading Pre-tax retirement

Postby Finance-MD » Tue Apr 18, 2017 10:44 pm

We frontloaded 2 of our 3 work retirement accounts (Her 457 and Her 403b elective deferrals) and maxed them out in Q1 this year.

We are both W2 employees and have used our own escrow account in savings to keep up with any underwithholdings, which worked fine for 2016, since our 2016 withholdings were 300% our 2015 tax liability. Our 2016 tax liability is not finalized yet, but my understanding is to be safe, we should have 110% of 2016 tax liability paid through a combination of withholding and quarterly estimated payments throughout 2017.

So I took 2016 expected tax liability x 110% / 4 and subtracted our combined withholdings thus far, which left us short.
Had we not front-loaded the deferrals, the withholdings would have been much more, and there would be more money available to submit for estimated payments.

We do have the money available in our tax escrow, so to be conservative, I went ahead and paid it, but did I have to?
Or would I have been okay letting our withholdings 'catch up' as the year went on?

Ideally, I'd love to know the minimum we need to have in per quarter to be legal and avoid IRS penalties or increased scrutiny; I routinely run estimated taxes and make sure we have enough in our personal escrow; we do like to have the cash in our own savings accounts for a liquidity buffer, etc (and to not make any unnecessary free loans to the government). I'm sure there is a good thread on this somewhere...

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FiveK
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Re: Quarterly estimated tax if Frontloading Pre-tax retirement

Postby FiveK » Wed Apr 19, 2017 2:23 am

Form 2210 is the main IRS form to determine the sufficiency of estimated payments.

Note that "to be safe...have 110% of 2016 tax liability paid through a combination of withholding and quarterly estimated payments throughout 2017."

For that particular "safe harbor" (i.e., the converse of the General Rule items on the first page of that document), only the withheld amount is used.

Increasing your withholding by decreasing allowances (or asking for extra withholding directly) on W-4 forms should work. Increasing estimated tax payments can forestall penalties for owing too much tax, but only from the date of the estimated tax. Extra withholding can make up for underpayments all year.

Finance-MD
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Re: Quarterly estimated tax if Frontloading Pre-tax retirement

Postby Finance-MD » Wed Apr 19, 2017 10:32 pm

Thanks so much FiveK!
Does the IRS care when those withheld funds are withheld or is it just by the end of 2017 that matters?

e.g. can i keep my W4 as married with 2 allowances, save the cash, then in December, update my W-4 so they withhold up to 100% of my post-tax money (or whatever it needs to be) to get my withholding where it needs to be such that we meet the 110% of 2016 safe harbor amount?

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FiveK
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Re: Quarterly estimated tax if Frontloading Pre-tax retirement

Postby FiveK » Wed Apr 19, 2017 10:56 pm

Finance-MD wrote:Thanks so much FiveK!
Does the IRS care when those withheld funds are withheld or is it just by the end of 2017 that matters?
By the end of 2017. That's what makes withholding "better" than estimated payments.

e.g. can i keep my W4 as married with 2 allowances, save the cash, then in December, update my W-4 so they withhold up to 100% of my post-tax money (or whatever it needs to be) to get my withholding where it needs to be such that we meet the 110% of 2016 safe harbor amount?
Yes - if your payroll department processes your W-4 correctly and in time for the December pay.

Personally, I wouldn't cut it that close....

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House Blend
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Re: Quarterly estimated tax if Frontloading Pre-tax retirement

Postby House Blend » Thu Apr 20, 2017 1:51 pm

Finance-MD wrote:We do have the money available in our tax escrow, so to be conservative, I went ahead and paid it, but did I have to?
Or would I have been okay letting our withholdings 'catch up' as the year went on?

Ideally, I'd love to know the minimum we need to have in per quarter to be legal and avoid IRS penalties or increased scrutiny; I routinely run estimated taxes and make sure we have enough in our personal escrow; we do like to have the cash in our own savings accounts for a liquidity buffer, etc (and to not make any unnecessary free loans to the government).

Withholding is preferable for paying taxes (vs. estimated tax payments) if you have a choice, since it doesn't matter for safe harbor purposes when it is withheld.

Another curiosity is that if you do make estimated tax payments, and are unwilling to dig in and analyze exactly how much is needed for each payment, then it is best to make four equal payments. In that special case, it doesn't matter for penalty/safe harbor purposes whether your taxable income was irregularly produced during the year. (Unfortunately, it does require clairvoyance if on April 18, 2017 you still don't have a solid grasp of your 2016 or 2017 taxes.)

In any case, I think either approach (withholding only, or withhold plus estimated tax payments, equal or not) is reasonable, and I would not stress out about missing a safe harbor by smallish amounts. Chances are that any penalty will amount to round off error compared to the total tax bill.

FWIW, my preference is no front loading to begin with. Not worth the bother to me. I do tinker with W-4's. I start out withholding at the low end of reasonable, and adjust upwards if needed in the second half of the year.

Finance-MD
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Re: Quarterly estimated tax if Frontloading Pre-tax retirement

Postby Finance-MD » Thu Apr 20, 2017 6:38 pm

Thanks again FiveK and House Blend!
You guys are awesome...

Yes - if your payroll department processes your W-4 correctly and in time for the December pay.

Personally, I wouldn't cut it that close....


Yeah, in reality, I probably won't cut it *that* close; was just asking in theory. My wife and I both luckily have electronic W-4's online through payroll, so the process is quite fluid. My 2016 taxes will definitely (?) be done by 10/15/17... so I can look back at our withholdings YTD at that point and make any adjustment needed to get it done by November 30, leaving 2 December paychecks just to make sure. My W-2 income this year is going to be higher than last year, so I think we'll get to 110% by that point anyhow.

In any case, I think either approach (withholding only, or withhold plus estimated tax payments, equal or not) is reasonable, and I would not stress out about missing a safe harbor by smallish amounts. Chances are that any penalty will amount to round off error compared to the total tax bill.


Thanks - yes, I agree. I looked into the cost of late tax 'penalties,' and gosh, I think they are super reasonable in the grand scheme of things; the late *filing* penalty, yes... that's a "penalty." But the interest they charge on late payments would be pretty good rates for a 0 point short term loan if cash-strapped.

My primary concern is just not triggering any unnecessary IRS red flags.... no need for increased scrutiny since statistically, we are at a relatively high risk for an audit just based on our incomes / businesses / schedule C deductions, etc....


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