Paying Taxes Quarterly

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dcop
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Paying Taxes Quarterly

Post by dcop » Fri Sep 08, 2017 6:32 pm

I will be retiring in a few months and will no longer have W2 income, only withdrawals from tax deferred retirement accounts.

I understand the dates the quarterly payments are due to IRS but am a bit unclear as to the under-payment and over-payment (I've heard there are over-payment penalties). Here's my question to how I think I would be ok...

Say I withdraw 40K in 2018 starting 1/1/18 and I'm 60 Y/O.

Quarter 1 - I know I'm going to withdraw 10k. With the first $10400 being offset by the personal exemption and standard deduction I would pay in $0.

Quarter 2 - I know I'm going to withdraw 10k. This would put my taxable for the YTD at $9600 so I would pay in 10% of $9325 and 15% of $275.

Quarter 3 - I know I'm going to withdraw 10k. This would put my taxable for the YTD at $19600 so I would pay in 15% of $10000.

Quarter 4 - I know I'm going to withdraw 10k. This would put my taxable for the YTD at $29600 so I would pay in 15% of $10000.

I'm mainly wondering if figuring in the personal exemption and standard deduction in the first quarter is acceptable to the rules of quarterly payments.

Thnx in advance. :happy

MarkNYC
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Re: Paying Taxes Quarterly

Post by MarkNYC » Fri Sep 08, 2017 8:01 pm

No, that method won't work. It should be done this way:

If your income in the first quarter is $10K, you would annualize that out to $40K for the year. Subtracting the $10,400 for exemption and standard deduction would give you taxable income of $29,600. If tax on that amount is $4,000, you would owe 25% of that for the first quarter = $1K. Similar proportionate calculations would be done for the 2nd and 3rd quarters.

dcop
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Re: Paying Taxes Quarterly

Post by dcop » Fri Sep 08, 2017 8:11 pm

MarkNYC wrote:
Fri Sep 08, 2017 8:01 pm
No, that method won't work. It should be done this way:

If your income in the first quarter is $10K, you would annualize that out to $40K for the year. Subtracting the $10,400 for exemption and standard deduction would give you taxable income of $29,600. If tax on that amount is $4,000, you would owe 25% of that for the first quarter = $1K. Similar proportionate calculations would be done for the 2nd and 3rd quarters.
Ahhh simple enough. Thanks MarkNYC!!!

MarkNYC
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Re: Paying Taxes Quarterly

Post by MarkNYC » Fri Sep 08, 2017 8:16 pm

dcop wrote:
Fri Sep 08, 2017 8:11 pm
MarkNYC wrote:
Fri Sep 08, 2017 8:01 pm
No, that method won't work. It should be done this way:

If your income in the first quarter is $10K, you would annualize that out to $40K for the year. Subtracting the $10,400 for exemption and standard deduction would give you taxable income of $29,600. If tax on that amount is $4,000, you would owe 25% of that for the first quarter = $1K. Similar proportionate calculations would be done for the 2nd and 3rd quarters.
Ahhh simple enough. Thanks MarkNYC!!!
To avoid the penalty, it is only necessary to pay 90% of the actual tax, not 100% - assuming you are not paying amounts based on your prior year tax.

DrGoogle2017
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Re: Paying Taxes Quarterly

Post by DrGoogle2017 » Fri Sep 08, 2017 8:21 pm

From what I've read, if you pay no tax last year, we didn't , you don't have to send in estimated tax. But I did anyway because I did some Roth conversion.

dcop
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Re: Paying Taxes Quarterly

Post by dcop » Fri Sep 08, 2017 8:25 pm

MarkNYC wrote:
Fri Sep 08, 2017 8:16 pm
To avoid the penalty, it is only necessary to pay 90% of the actual tax, not 100% - assuming you are not paying amounts based on your prior year tax.
So meeting the 90% quarterly on an annualized average? Let's say for whatever reason when December comes I realize I wont need 10K for the final quarter and only withdraw 5K. In that case I would be ok paying 25% of the tax on $24,600 in the final quarter?

MarkNYC
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Re: Paying Taxes Quarterly

Post by MarkNYC » Fri Sep 08, 2017 8:33 pm

dcop wrote:
Fri Sep 08, 2017 8:25 pm
MarkNYC wrote:
Fri Sep 08, 2017 8:16 pm
To avoid the penalty, it is only necessary to pay 90% of the actual tax, not 100% - assuming you are not paying amounts based on your prior year tax.
So meeting the 90% quarterly on an annualized average? Let's say for whatever reason when December comes I realize I wont need 10K for the final quarter and only withdraw 5K. In that case I would be ok paying 25% of the tax on $24,600 in the final quarter?
If tax on $24,600 is $3,500, your 4th quarter payment, plus your 1st 3 payments, would have to be at least 90% of $3,500.

dcop
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Re: Paying Taxes Quarterly

Post by dcop » Fri Sep 08, 2017 8:36 pm

MarkNYC wrote:
Fri Sep 08, 2017 8:33 pm
If tax on $24,600 is $3,500, your 4th quarter payment, plus your 1st 3 payments, would have to be at least 90% of $3,500.
Perfect!! Very helpful!

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Dale_G
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Re: Paying Taxes Quarterly

Post by Dale_G » Fri Sep 08, 2017 9:57 pm

dcop - there are no penalties for over paying - or over withholding.

Instead of filing quarterly estimated taxes however, consider having taxes withheld from your tax deferred distributions. If you have taxes withheld the IRS treats them as being paid uniformly throughout the tax year. You could skip having taxes withheld on some number of distributions early in the year as long as you make it up by the end of the year.

I (and many other Bogleheads) take a single distribution at the end of the year and have taxes withheld at that time, but you could manage the tax withholding for monthly or quarterly or random distributions. This eliminates the need to file quarterly estimated taxes.

Dale
Volatility is my friend

dcop
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Re: Paying Taxes Quarterly

Post by dcop » Fri Sep 08, 2017 10:14 pm

Dale_G wrote:
Fri Sep 08, 2017 9:57 pm
dcop - there are no penalties for over paying - or over withholding.

Instead of filing quarterly estimated taxes however, consider having taxes withheld from your tax deferred distributions. If you have taxes withheld the IRS treats them as being paid uniformly throughout the tax year. You could skip having taxes withheld on some number of distributions early in the year as long as you make it up by the end of the year.

I (and many other Bogleheads) take a single distribution at the end of the year and have taxes withheld at that time, but you could manage the tax withholding for monthly or quarterly or random distributions. This eliminates the need to file quarterly estimated taxes.

Dale
Cool thanks for clarifying the 'no over-payment issue Dale_G. I was just wondering about having withholding done. You're reply confirms that custodians do that if requested. I think this is the easiest route to go.

sport
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Re: Paying Taxes Quarterly

Post by sport » Fri Sep 08, 2017 10:18 pm

Don't forget about state income tax requirements if that applies to you.

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grabiner
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Re: Paying Taxes Quarterly

Post by grabiner » Fri Sep 08, 2017 10:33 pm

dcop wrote:
Fri Sep 08, 2017 6:32 pm
I will be retiring in a few months and will no longer have W2 income, only withdrawals from tax deferred retirement accounts.

I understand the dates the quarterly payments are due to IRS but am a bit unclear as to the under-payment and over-payment (I've heard there are over-payment penalties). Here's my question to how I think I would be ok...

Say I withdraw 40K in 2018 starting 1/1/18 and I'm 60 Y/O.

Quarter 1 - I know I'm going to withdraw 10k. With the first $10400 being offset by the personal exemption and standard deduction I would pay in $0.

Quarter 2 - I know I'm going to withdraw 10k. This would put my taxable for the YTD at $9600 so I would pay in 10% of $9325 and 15% of $275.

Quarter 3 - I know I'm going to withdraw 10k. This would put my taxable for the YTD at $19600 so I would pay in 15% of $10000.

Quarter 4 - I know I'm going to withdraw 10k. This would put my taxable for the YTD at $29600 so I would pay in 15% of $10000.
This will not work; see Schedule AI for Form 2210 to see why it doesn't work. Your required payment in the first quarter is based on four times your income in that quarter, less the full standard deduction and personal exemption; you owe 22.5% of the tax on that amount if you use Schedule AI. (If you don't use Schedule AI, you owe 22.5% of your tax for the full year in each quarter, this would be the same amount if your income is the same for each month.)
David Grabiner

dcop
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Re: Paying Taxes Quarterly

Post by dcop » Fri Sep 08, 2017 11:30 pm

grabiner wrote:
Fri Sep 08, 2017 10:33 pm
This will not work; see Schedule AI for Form 2210 to see why it doesn't work. Your required payment in the first quarter is based on four times your income in that quarter, less the full standard deduction and personal exemption; you owe 22.5% of the tax on that amount if you use Schedule AI. (If you don't use Schedule AI, you owe 22.5% of your tax for the full year in each quarter, this would be the same amount if your income is the same for each month.)
Thanks grabiner. I'm (pretty sure) going to go with withholding on Vanguards side. Seems more flexible and less steps for me to take. As long as I dont under withhold.

So...that said what if I did withholding on my tax deferred withdraws BUT I have a taxable capital gain on an equity (taxable holding) in the 3rd quarter only? Could I just make a one time estimated payment in the 3rd quarter for that transaction to the IRS separate from my withholding?

kaneohe
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Re: Paying Taxes Quarterly

Post by kaneohe » Sat Sep 09, 2017 8:42 am

dcop wrote:
Fri Sep 08, 2017 11:30 pm
......................................................

So...that said what if I did withholding on my tax deferred withdraws BUT I have a taxable capital gain on an equity (taxable holding) in the 3rd quarter only? Could I just make a one time estimated payment in the 3rd quarter for that transaction to the IRS separate from my withholding?
You could.........but it will be SO much easier if you do that by withholding. If you do it by estimated tax, you will have to demonstrate to IRS that you paid that in a timely fashion. That requires you to fill out Form 2210 Sch AI........which is kind of like filing your income tax return 4x. Take a
quick look at that form and try filling it in.

If you do it by withholding, IRS will assume you paid it uniformly throughout the year and you won't have to demonstrate anything.

fourwheelcycle
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Re: Paying Taxes Quarterly

Post by fourwheelcycle » Sat Sep 09, 2017 10:30 am

Dale_G wrote:
Fri Sep 08, 2017 9:57 pm
If you have [RMD] taxes withheld the IRS treats them as being paid uniformly throughout the tax year. I ... take a single distribution at the end of the year and have taxes withheld at that time... This eliminates the need to file quarterly estimated taxes.
A. I did not know this.

B. Great idea. Thanks!

My father was an accountant (he is now 95 and I manage HIS finances). He always told me I would be OK if my total withholding equaled my previous year's tax plus $1. Our RMDs will begin soon. I will plan to have my wife take her's in December and withhold enough to top off our total withholding @ last year's tax plus $1K - I always like to stay on the IRS' good side.

dcop
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Re: Paying Taxes Quarterly

Post by dcop » Sat Sep 09, 2017 10:40 am

kaneohe wrote:
Sat Sep 09, 2017 8:42 am
You could.........but it will be SO much easier if you do that by withholding. If you do it by estimated tax, you will have to demonstrate to IRS that you paid that in a timely fashion. That requires you to fill out Form 2210 Sch AI........which is kind of like filing your income tax return 4x. Take a
quick look at that form and try filling it in.

If you do it by withholding, IRS will assume you paid it uniformly throughout the year and you won't have to demonstrate anything.
Yikes...yea I just just checked out that IRS form. But yes, I could pay the tax for the CG from my tax-deferred account via withholding. Simple enough, thanx kaneohe.

kaneohe
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Re: Paying Taxes Quarterly

Post by kaneohe » Sat Sep 09, 2017 11:55 am

fourwheelcycle wrote:
Sat Sep 09, 2017 10:30 am
..........................................................
He always told me I would be OK if my total withholding equaled my previous year's tax plus $1. ........................
Generally true......just remember if AGI in previous yr > 150K, you need to pay 110% of previous yr. taxes.

dcop
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Re: Paying Taxes Quarterly

Post by dcop » Sat Sep 09, 2017 2:37 pm

kaneohe wrote:
Sat Sep 09, 2017 11:55 am
Generally true......just remember if AGI in previous yr > 150K, you need to pay 110% of previous yr. taxes.
That'll apply when RMD's kick in in 11 years. Hopefully this thread is still around for me to reference then. :idea:

fourwheelcycle
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Re: Paying Taxes Quarterly

Post by fourwheelcycle » Sat Sep 09, 2017 9:29 pm

kaneohe wrote:
Sat Sep 09, 2017 11:55 am
fourwheelcycle wrote:
Sat Sep 09, 2017 10:30 am
My father always told me I would be OK if my total withholding equaled my previous year's tax plus $1.
Generally true......just remember if AGI in previous yr > 150K, you need to pay 110% of previous yr. taxes.
You're right! I had heard that, but I have never had a problem following my father's rule. When my father gave me that advice, in the 1970s, there may not have been a special high income rule, or if there was, my income was well below it.

I had never looked up the actual IRS rules until today when I saw your comment. There seems to be a mid-ground in which you are OK if your income is over $150K but your withholding equals at least 90% of the tax you owe, even though your withholding may not equal 110% of your previous year's tax. Am I interpreting the IRS rules correctly?

In any event, I have never had a withholding problem with the IRS.

kaneohe
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Re: Paying Taxes Quarterly

Post by kaneohe » Sat Sep 09, 2017 9:34 pm

fourwheelcycle wrote:
Sat Sep 09, 2017 9:29 pm
kaneohe wrote:
Sat Sep 09, 2017 11:55 am
fourwheelcycle wrote:
Sat Sep 09, 2017 10:30 am
My father always told me I would be OK if my total withholding equaled my previous year's tax plus $1.
Generally true......just remember if AGI in previous yr > 150K, you need to pay 110% of previous yr. taxes.
You're right! I had heard that, but I have never had a problem following my father's rule. When my father gave me that advice, in the 1970s, there may not have been a special high income rule, or if there was, my income was well below it.

I had never looked up the actual IRS rules until today when I saw your comment. There seems to be a mid-ground in which you are OK if your income is over $150K but your withholding equals at least 90% of the tax you owe, even though your withholding may not equal 110% of your previous year's tax. Am I interpreting the IRS rules correctly?

In any event, I have never had a withholding problem with the IRS.
Yes you are correct......one safe harbor deals w/ last yrs taxes; the other deals with this yrs. Not sure I'd call it mid-ground.......depending on which direction your income went,one or the other will be the best to use.

Lexi
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Re: Paying Taxes Quarterly

Post by Lexi » Sun Sep 10, 2017 4:43 pm

sport wrote:
Fri Sep 08, 2017 10:18 pm
Don't forget about state income tax requirements if that applies to you.
If your state does not tax retirement withdrawals (e.g. If contributions were not excluded from state tax originally) it is not good to have state income tax payments withheld from the distribution because the state may not pay attention to those reporting forms.

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Lancelot
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Re: Paying Taxes Quarterly

Post by Lancelot » Mon Sep 11, 2017 8:10 pm

Really good info about taking a large IRA withdrawl late in the year and withholding 90% of your annual tax bill. Thanks!
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