Safe harbor / Withholding question

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Norton750
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Safe harbor / Withholding question

Post by Norton750 » Sat Sep 29, 2018 9:46 pm

My question is whether or not the following situation might result in an underpayment penalty from the IRS.
• The only income received for the year is from Social Security benefits ($30K) and RMDs from a traditional IRA ($50K). $80K total income.
• No estimated taxes are paid.
• The monthly Social Security benefit checks are received throughout the year and no withholding is done from these.
• The annual RMD is taken in December with enough federal tax withheld to match the previous year’s federal taxes paid (one of the safe harbors).

That’s it. I get different opinions on whether it’s OK to receive SS benefit each quarter but to do no withholding until the Q4 RMD.

Thanks for any info you can supply.

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Mel Lindauer
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Re: Safe harbor / Withholding question

Post by Mel Lindauer » Sat Sep 29, 2018 10:20 pm

I'm not a tax expert, buy my understanding is that withholding 100% of the previous year's tax from one's RMD satisfies one of the safe harbor requirements, since withholding is considered to have been equally distributed throughout the year.

That's what many folks do to avoid having to make quarterly estimated tax payments.
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terran
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Re: Safe harbor / Withholding question

Post by terran » Sun Sep 30, 2018 8:31 am

According to the instructions for Line 74, Form 1040 which is Federal Income Tax
Withheld say "Add the amounts shown as federal income tax withheld on your Forms W-2, W-2G, and 1099-R." Based on Form 2210 and its instructions, if your line 64 withholding is at least 100% of your previous year tax liability (at your AGI), you don't owe a penalty, so you should be good.

That answer might change if you were making a single estimated tax payment at the end of the year. Withholding is considered to have been taken appropriately throughout the year no matter when it's taken, while estimated taxes need to be paid at the appropriate time based on when the income is received (or I think evenly throughout the year is fine, but I'm not certain about that).

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grabiner
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Re: Safe harbor / Withholding question

Post by grabiner » Sun Sep 30, 2018 8:52 am

terran wrote:
Sun Sep 30, 2018 8:31 am
That answer might change if you were making a single estimated tax payment at the end of the year. Withholding is considered to have been taken appropriately throughout the year no matter when it's taken, while estimated taxes need to be paid at the appropriate time based on when the income is received (or I think evenly throughout the year is fine, but I'm not certain about that).
You are correct that estimated taxes are treated as being paid at the time they were made; if you should have paid estimated tax on April 15 and pay it later, you will owe interest from April 15 to the day it was actually paid.

However, you can pay four equal installments of estimated tax in the four quarters, no matter when you actually earned the income. By default, you compute the underpayment penalty based on 1/4 of the tax being due in each quarter. You can choose to fill out Schedule AI on Form 2210 to determine how much tax was due as of the end of each quarter, and compute the penalty for underpayment (or avoid it entirely) based on 90% of that amount; this would be useful if you receive a large amount of income at the end of the year which was not withheld.
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grabiner
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Re: Safe harbor / Withholding question

Post by grabiner » Sun Sep 30, 2018 8:54 am

Mel Lindauer wrote:
Sat Sep 29, 2018 10:20 pm
I'm not a tax expert, buy my understanding is that withholding 100% of the previous year's tax from one's RMD satisfies one of the safe harbor requirements, since withholding is considered to have been equally distributed throughout the year.
It may be 110% if your previous year's income was very high.

If you pay income tax to your state, check with your state tax bureau for the safe harbor rule; it varies by state. Also, you need to check whether your IRA custodian can withhold the correct amount of state tax.
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terran
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Re: Safe harbor / Withholding question

Post by terran » Sun Sep 30, 2018 8:59 am

grabiner wrote:
Sun Sep 30, 2018 8:52 am
terran wrote:
Sun Sep 30, 2018 8:31 am
That answer might change if you were making a single estimated tax payment at the end of the year. Withholding is considered to have been taken appropriately throughout the year no matter when it's taken, while estimated taxes need to be paid at the appropriate time based on when the income is received (or I think evenly throughout the year is fine, but I'm not certain about that).
...

However, you can pay four equal installments of estimated tax in the four quarters, no matter when you actually earned the income. By default, you compute the underpayment penalty based on 1/4 of the tax being due in each quarter. You can choose to fill out Schedule AI on Form 2210 to determine how much tax was due as of the end of each quarter, and compute the penalty for underpayment (or avoid it entirely) based on 90% of that amount; this would be useful if you receive a large amount of income at the end of the year which was not withheld.
Thanks, that's what I thought, but I wasn't certain.

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siamond
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Re: Safe harbor / Withholding question

Post by siamond » Mon Oct 01, 2018 3:18 pm

Hm. Let me make sure I understand this, because I can interpret some of the answers in different ways... Let's solely focus on Federal taxes.

The OP will receive monthly SS income. The OP will not set any tax withholding on such SS income. The OP plans to set up the RMD distribution in December of the taxable year, so that the corresponding tax withholding will cover the taxes due to the combination of SS and RMD income (or at least enter the 'safe harbor').

The OP thinks that, thanks to the December withholding, no estimated/quarterly taxes are due during the year, although SS income is received every month. In other words, the December withholding nullifies the need for quarterly estimated taxes.

Could tax experts confirm? This should be a simple YES or NO answer.

terran
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Re: Safe harbor / Withholding question

Post by terran » Mon Oct 01, 2018 6:05 pm

siamond wrote:
Mon Oct 01, 2018 3:18 pm
Hm. Let me make sure I understand this, because I can interpret some of the answers in different ways... Let's solely focus on Federal taxes.

The OP will receive monthly SS income. The OP will not set any tax withholding on such SS income. The OP plans to set up the RMD distribution in December of the taxable year, so that the corresponding tax withholding will cover the taxes due to the combination of SS and RMD income (or at least enter the 'safe harbor').

The OP thinks that, thanks to the December withholding, no estimated/quarterly taxes are due during the year, although SS income is received every month. In other words, the December withholding nullifies the need for quarterly estimated taxes.

Could tax experts confirm? This should be a simple YES or NO answer.
Yes, that is my understanding of the OP's plan, and my understanding of the tax code is that this plan will result in no underpayment penalties.

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