Paying estimated quarterly taxes, what is the process?

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Captain kangaroo
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Paying estimated quarterly taxes, what is the process?

Post by Captain kangaroo » Sun Dec 31, 2017 11:36 pm

I will try to keep this simple. Say I have 1,000,000 dollars in VTSAX that pays out 5,000 a quarter in dividends.

If I receive 5,000 on May 31st, I would have until June 15th to pay Uncle Sam his share.

I am in the 25% federal tax bracket. Would it be as simple as just multiplying 5,000 by 15% and sending that to the IRS, as well as my state tax collector (at my state rate).

Or is it slightly more complicated?

Wakefield1
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Re: Paying estimated quarterly taxes, what is the process?

Post by Wakefield1 » Mon Jan 01, 2018 12:12 am

You need to get IRS forms and probably forms from your State-I think the IRS form is "Form 1040 ES" I think the forms come in a packet of 4 or 5 for the tax year with the due dates on them and instructions-I think there are very specific instructions as to what to write on the check sent as payment with the form.
I believe there is also an online IRS portal via which the payments can be made
as to how much to pay would depend on whether you also have some withholding for Federal (and State) tax but if you are in 25% bracket (marginal) I would think that the estimated tax payment would need to be 25% of the $5000. or whatever income that quarter would need to be covered. And the State 5.75% or whatever your particular State charges
there might be some leniency allowed as to owing some tax as of filing season but I think it would be safest to cover all of the tax obligation with the payments + withholding for each quarter. I believe it has been posted on the Forum that by having enough tax withheld you can cover a shortfall with owed tax for previous quarters but that the Estimated Tax payments must be on time. (More leniency for "catch up" via extra withholding than for Estimated Tax payments)

Wakefield1
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Re: Paying estimated quarterly taxes, what is the process?

Post by Wakefield1 » Mon Jan 01, 2018 12:17 am

There may be some "safe harbor" for being under withheld and/or not having paid all of the Estimated Tax owed at filing time for such circumstances as having paid at least as much as the previous year's total tax bill. Or owing less than $1000. State might be different.

NomadicExpat
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Re: Paying estimated quarterly taxes, what is the process?

Post by NomadicExpat » Mon Jan 01, 2018 12:32 am

Wakefield1 wrote:
Mon Jan 01, 2018 12:12 am
I believe there is also an online IRS portal via which the payments can be made
Here is the IRS EFTPS Website: https://www.eftps.gov/eftps/

It takes a few days to get your bank account linked/verified when initially setting up the EFTPS account

Here is the verbage on the Estimated Tax Penalty from the IRS website:

Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

kaneohe
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Re: Paying estimated quarterly taxes, what is the process?

Post by kaneohe » Mon Jan 01, 2018 9:40 am

Captain kangaroo wrote:
Sun Dec 31, 2017 11:36 pm
..............................................................
I am in the 25% federal tax bracket. Would it be as simple as just multiplying 5,000 by 15% and sending that to the IRS, as well as my state tax collector (at my state rate).

..............................

Is there a reason for the difference in the 2 bolded numbers above? If paying estimated taxes, keep in mind that it is simpler to keep all payments the same (or at least pay "faster" than you would have by keeping them the same. If you pay according how you received the income, then you will have to demonstrate you paid in a timely manner. If the income and payments are lumpy during the yr, this process becomes much more involved.

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grabiner
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Re: Paying estimated quarterly taxes, what is the process?

Post by grabiner » Mon Jan 01, 2018 11:16 am

kaneohe wrote:
Mon Jan 01, 2018 9:40 am
Captain kangaroo wrote:
Sun Dec 31, 2017 11:36 pm
..............................................................
I am in the 25% federal tax bracket. Would it be as simple as just multiplying 5,000 by 15% and sending that to the IRS, as well as my state tax collector (at my state rate).

..............................
Is there a reason for the difference in the 2 bolded numbers above?
This distribution is a qualified dividend, taxed at 15%.

However, it's not quite that simple. If you use the annualized installment method, you prorate your income by quarter, independent of its tax rate. If you take a large long-term capital gain (taxed at a low rate) in the first quarter, and withdraw an equal amount from your IRA (taxed at your full tax rate) in the other three quarters, you still need to make equal payments in the four quarters.

Therefore, most taxpayers estimate the total tax due, and make four equal payments. The annualized method can be used to avoid the penalty if you earn extra money later in the year and don't have withholding.
David Grabiner

kaneohe
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Re: Paying estimated quarterly taxes, what is the process?

Post by kaneohe » Mon Jan 01, 2018 11:43 am

grabiner wrote:
Mon Jan 01, 2018 11:16 am
kaneohe wrote:
Mon Jan 01, 2018 9:40 am
Captain kangaroo wrote:
Sun Dec 31, 2017 11:36 pm
..............................................................
I am in the 25% federal tax bracket. Would it be as simple as just multiplying 5,000 by 15% and sending that to the IRS, as well as my state tax collector (at my state rate).

..............................
Is there a reason for the difference in the 2 bolded numbers above?
This distribution is a qualified dividend, taxed at 15%.

..................................
:oops: Thanks, David..............slow start in 2018...........

pshonore
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Re: Paying estimated quarterly taxes, what is the process?

Post by pshonore » Mon Jan 01, 2018 1:02 pm

grabiner wrote:
Mon Jan 01, 2018 11:16 am
kaneohe wrote:
Mon Jan 01, 2018 9:40 am
Captain kangaroo wrote:
Sun Dec 31, 2017 11:36 pm
..............................................................
I am in the 25% federal tax bracket. Would it be as simple as just multiplying 5,000 by 15% and sending that to the IRS, as well as my state tax collector (at my state rate).

..............................
Is there a reason for the difference in the 2 bolded numbers above?
This distribution is a qualified dividend, taxed at 15%.

However, it's not quite that simple. If you use the annualized installment method, you prorate your income by quarter, independent of its tax rate. If you take a large long-term capital gain (taxed at a low rate) in the first quarter, and withdraw an equal amount from your IRA (taxed at your full tax rate) in the other three quarters, you still need to make equal payments in the four quarters.

Therefore, most taxpayers estimate the total tax due, and make four equal payments. The annualized method can be used to avoid the penalty if you earn extra money later in the year and don't have withholding.
When I use the AI method of Form 2210, the quarters match payment dates and are different. Q1 runs thru 3/31; Q2 thru 5/31; Q3 thru 8/31 and Q4 thru 12/31. So three months, two months, three months and four months. Depending on your annualized tax for Q1, you can make a lower payment if as an example, you determined your cap gain was 0% for that period. I generally take RMDs and do Roth conversions after Sept 1 which gives a lower annualized tax rate for the first three periods and a higher one for the fourth period

MarkNYC
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Re: Paying estimated quarterly taxes, what is the process?

Post by MarkNYC » Mon Jan 01, 2018 1:51 pm

grabiner wrote:
Mon Jan 01, 2018 11:16 am
kaneohe wrote:
Mon Jan 01, 2018 9:40 am
Captain kangaroo wrote:
Sun Dec 31, 2017 11:36 pm
..............................................................
I am in the 25% federal tax bracket. Would it be as simple as just multiplying 5,000 by 15% and sending that to the IRS, as well as my state tax collector (at my state rate).

..............................
Is there a reason for the difference in the 2 bolded numbers above?
This distribution is a qualified dividend, taxed at 15%.

However, it's not quite that simple. If you use the annualized installment method, you prorate your income by quarter, independent of its tax rate. If you take a large long-term capital gain (taxed at a low rate) in the first quarter, and withdraw an equal amount from your IRA (taxed at your full tax rate) in the other three quarters, you still need to make equal payments in the four quarters.
David,

I have to disagree with you on this. When using the annualized income method on Form 2210, computing the tax for each quarterly period takes into account the reduced rate on qualified dividends and l/t gains for the "quarter." So if a taxpayer is in the 25% bracket, and each quarterly period has the same amount of (annualized) income but one period has qualified dividends or l/t gains, then the required payment will not be the same for all 4 periods,

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grabiner
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Re: Paying estimated quarterly taxes, what is the process?

Post by grabiner » Mon Jan 01, 2018 7:07 pm

MarkNYC wrote:
Mon Jan 01, 2018 1:51 pm
grabiner wrote:
Mon Jan 01, 2018 11:16 am
kaneohe wrote:
Mon Jan 01, 2018 9:40 am
Captain kangaroo wrote:
Sun Dec 31, 2017 11:36 pm
..............................................................
I am in the 25% federal tax bracket. Would it be as simple as just multiplying 5,000 by 15% and sending that to the IRS, as well as my state tax collector (at my state rate).

..............................
Is there a reason for the difference in the 2 bolded numbers above?
This distribution is a qualified dividend, taxed at 15%.

However, it's not quite that simple. If you use the annualized installment method, you prorate your income by quarter, independent of its tax rate. If you take a large long-term capital gain (taxed at a low rate) in the first quarter, and withdraw an equal amount from your IRA (taxed at your full tax rate) in the other three quarters, you still need to make equal payments in the four quarters.
David,

I have to disagree with you on this. When using the annualized income method on Form 2210, computing the tax for each quarterly period takes into account the reduced rate on qualified dividends and l/t gains for the "quarter." So if a taxpayer is in the 25% bracket, and each quarterly period has the same amount of (annualized) income but one period has qualified dividends or l/t gains, then the required payment will not be the same for all 4 periods,
You are correct here. I rechecked the Form 2210 Instructions, and it says that you should figure your tax using the appropriate formula for tax computation, including the Qualified Dividends and Capital Gains Tax Worksheet. Thus, if you have a large long-term capital gain in the first quarter which is 25% of your income, the estimated tax due will be less than 25% of the estimate if you fill out schedule AI.
David Grabiner

FactualFran
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Joined: Sat Feb 21, 2015 2:29 pm

Re: Paying estimated quarterly taxes, what is the process?

Post by FactualFran » Tue Jan 02, 2018 5:24 pm

Captain kangaroo wrote:
Sun Dec 31, 2017 11:36 pm
I am in the 25% federal tax bracket. Would it be as simple as just multiplying 5,000 by 15% and sending that to the IRS, as well as my state tax collector (at my state rate).

Or is it slightly more complicated?
Making quarterly payments as described does not necessarily avoid there being an underpayment penalty. Neither does not making the quarterly payments necessarily mean that there will be an underpayment penalty. It all depends on how much was withheld in income tax for the year.

If the difference between the Federal income tax for a year and the amount withheld is less than $1,000, then there is no underpayment penalty. The state income tax may also use a threshold but not necessarily $1,000.

With Federal income tax, If the amount withheld for a year is at least the required annual payment, then there is no underpayment penalty. The required annual payment is the smaller of 1) 90% of the income tax for the year and 2) the maximum required annual payment based on the prior year's tax (also called the safe harbor amount). The state income tax may have similar conditions.

The quarterly payments made are included in the calculations of the underpayment penalty for each quarter when there may be an underpayment penalty due to the above conditions on the withholding amount not having been met. The quarterly payments will reduce or eliminate the underpayment penalty.

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