1040-ES, 2210 and under Withholding penalties.

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Batousai
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Joined: Mon Jul 30, 2012 11:21 am

1040-ES, 2210 and under Withholding penalties.

Post by Batousai » Tue Oct 02, 2012 3:43 pm

I think I've got my head wrapped this, but I want to make sure I'm not missing something, so if any personal tax experts could chime in and make sure I went through this right.

In 2011 both I and my wife worked. We planned (and did) have her leave her job in early Febuary of 2012. When she did, I recalculated my expected taxes for 2012 and adjusted my tax with holdings to be just a little more than that. Fast forward to present, she accepted a short term contract position that will be paid to her without with holdings. The net will put me just over 1K owed and less than 90% of the 2012 tax withheld.

The 1040-ES if I ran it on Jan 1 of 2012 is going to give me a different answer than if I run it on Dec 31, 2012. Am I suppose to run it once each quarter or what? If I run this on Jan 1 then I get a refund and thus wouldn't be making payments. If I ran it after she gets paid, I would have to make payments. *Note, after further research it appears the 1040-ES is sort of useless, I don't see any way for you to turn it in as a defense against penalites other than a letter asking for special treatment kind of thing.

So I went through a what my filling would look like trying to figure out how it would flow if I went that route. This brought me to line 77 of the 1040. The instructions for line 77 of the 1040 simply say I may owe the penalty if I'm over 1K and 10% of the tax amount, it does nothing to clarify this. The instructions do point towards 2210 to calculate the amount owed.

Assuming I end up with a varied income reason for filing a 2210 (part II, c) then using the worksheet in part IV I come up with because of the high loading in the first quarter (wife working for 1/2 of it and I got a bonus in that period), my anualized AGI never drops under the AGI until the last quarter.

Of course this means I'll have some under payment in the 3rd and 4th quarter, and thus a small (sub 20$) penalty.

So it sounds like I should pay enough to ensure I'll owe less than 1K before Jan 15th. Is this correct? Obviously if it's under 1K then the schedule 2210 never comes into play and I won't owe a penalty on the "under payment" in the third quarter.

Another thing, other than the 20$ for the interest penalty, are there any other tangible penalties for under payment? Like I'm going to increase chance for audit, or I have to with hold 110% of my expected taxes, or something like that?

Mudpuppy
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by Mudpuppy » Tue Oct 02, 2012 4:24 pm

The simplest solution is to have additional tax withheld from each paycheck between now and the end of the year to cover the withholdings on your wife's contract job. Add enough to avoid possible penalty territory, plus a little more to have a cushion in case your estimates are off. This should be an option on your W4 form (Line 6 "Additional amount, if any, you want withheld from each paycheck").

sscritic
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by sscritic » Tue Oct 02, 2012 4:35 pm

Also, any extra withholding done in November and December is treated as paid one-fourth on each of the due dates in April, June, September, and next January. Thus, you actually time-shift your withholding back in history, unlike your estimated payments that are treated as paid when paid. If in the end you owe a penalty, you will owe less with withholding as these "payments" would have been made earlier in the year.

Alan S.
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by Alan S. » Tue Oct 02, 2012 5:51 pm

For some people, it could be less of a hassle to take a 100% withheld IRA distribution and complete the rollover within 60 days with your liquid funds that you might have otherwise used to pay quarterly estimates. If your quarterlies are back loaded ( adequate in total but paid in last quarters), the IRS can still levy an underpayment penalty.

NOTE: Using an indirect IRA rollover is limited to one per account per 12 month rolling period, so be sure you qualify and be sure that locking yourself out of another one for 12 months will not be a problem.

Penguin
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by Penguin » Tue Oct 02, 2012 9:37 pm

Alan S. wrote:For some people, it could be less of a hassle to take a 100% withheld IRA distribution and complete the rollover within 60 days with your liquid funds that you might have otherwise used to pay quarterly estimates. If your quarterlies are back loaded ( adequate in total but paid in last quarters), the IRS can still levy an underpayment penalty.

NOTE: Using an indirect IRA rollover is limited to one per account per 12 month rolling period, so be sure you qualify and be sure that locking yourself out of another one for 12 months will not be a problem.
I really did try to confirm the section in boldface above, but I couldn't find a reference indicating that the IRS had the authority to refuse to credit a withholding payment as 4 quarterly payments. Can you please direct me to the IRS regulations that would pertain to this?
Thanks.
Jon

sscritic
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by sscritic » Tue Oct 02, 2012 9:42 pm

Penguin wrote:
Alan S. wrote:For some people, it could be less of a hassle to take a 100% withheld IRA distribution and complete the rollover within 60 days with your liquid funds that you might have otherwise used to pay quarterly estimates. If your quarterlies are back loaded ( adequate in total but paid in last quarters), the IRS can still levy an underpayment penalty.
I really did try to confirm the section in boldface above, but I couldn't find a reference indicating that the IRS had the authority to refuse to credit a withholding payment as 4 quarterly payments. Can you please direct me to the IRS regulations that would pertain to this?
Thanks.
quarterlies = estimated payments, not withholding, as I read Alan S. [I added some bold for you.]

Penguin
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by Penguin » Tue Oct 02, 2012 10:03 pm

Thanks sscritic, for clarifying. I think I understand now. You may make withholding payment in December for the full amount of estimated tax due and not be charged a penalty. On the other hand if you make an estimated tax payment for the same amount in December then you will be liable for a penalty, unless some other exception applies.
Do I have it correct now?
I must say that I didn't know the trick about making a distribution from your traditional IRA for the amount of tax due, withholding the entire amount and then rolling over the same amount into a new IRA within 60 days. (Can you roll it back into the same IRA?)
Jon

Alan S.
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by Alan S. » Tue Oct 02, 2012 10:14 pm

You can either roll it back or into a different IRA. Just be sure you observe the 12 month waiting period before doing a second such rollover.

Otherwise, you've got it.
If you make quarterly payments and you are close but fall short of one of the IRS' safe harbor rules (eg 100% of last year's tax or 90% of current year), the IRS may not bother to bill you late payment interest. Also, the current quarterly rate for late payment interest is only 3% annual. But there is no sense in falling short when you can avoid it.

Penguin
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by Penguin » Tue Oct 02, 2012 10:19 pm

Thanks, Alan S.
Jon

john94549
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by john94549 » Tue Oct 02, 2012 10:40 pm

I always "boot up" our withholding by plunking down whatever needs to be contributed in December from our Vanguard MMF. I just call them and ask to have "X" amount taken from our IRA and have it applied "Y%" to Federal and "Z%" to State. Painless.

I assume this discrepancy will someday be closed. But, for now, any amounts withheld at any time of the year are treated as if withheld across the year. Unlike Estimated Taxes.

Batousai
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by Batousai » Wed Oct 03, 2012 3:42 pm

Yeah, it's not a cash flow problem, just a hassle of strange income for the year. It is an interesting idea though.

Also, I thought when I was reading the penalty was 4% not 3% (not that it matters).

sscritic
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by sscritic » Wed Oct 03, 2012 4:41 pm

Batousai wrote: Also, I thought when I was reading the penalty was 4% not 3% (not that it matters).
It depends on the quarter. See page 5 of the instructions for Form 2210.
The penalty was 4% in the first and second "quarters" (they aren't) and 3% in the third and fourth. The penalty is computed by the day.

Code: Select all

Rate Period 3: October 1, 2011—December 31, 2011

8 Computation starting dates for this period . . . . . . . . . . . .

9 Number of days from the date on line 8 to the date the
  amount on line 1a was paid or 12/31/11, whichever is earlier

10 Underpayment             Number of days
   on line 1a        ×         on line 9                  × .03
                                / 365 
I don't know the numbers for 2012, but given what we know about interest rates they are likely to be 3% or even lower. The number of days will be 366 for the 1st, 2nd, and 3rd periods (as it was for the 4th period of 2011, 1/1/2012 - 4/15/2012); leap years are like that.

john94549
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Re: 1040-ES, 2210 and under Withholding penalties.

Post by john94549 » Thu Oct 04, 2012 5:46 am

Another thing. Remember that over-payments carried over to the next tax year (Form 1040, line 75) are counted as if paid by "voucher 1", i.e., on April 15.

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