Estimated Taxes Question -- Help!

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DC3509
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Estimated Taxes Question -- Help!

Post by DC3509 » Mon Apr 16, 2018 1:05 pm

All,

So I have been seething for the last 12 hours about some VERY unexpected tax problems. I would appreciate any advice from Bogleheads on this issue.

Bottom line -- I am paid entirely now through a K1 -- professional partnerships. My partnership "suggests" that we use a particular CPA firm, though it is not required. Almost entirely because of the recommendation, I decided to hire this firm, and pay roughly 3.5X what I have normally paid for my taxes. I was told they would provide tax planning, projections, etc.

The entire time I have found the accountant assigned to me to be less than helpful. I was projecting at the end of last year (last quarter was the first quarter I was paid on a K-1), that I was short by about $3K in what I had withheld. Being someone who carefully watches his expenses, this is A LOT of money to me. I was told by the accountant that he didn't follow my math, just make this end of year estimated payment, and don't worry about it.

Well, now, I get the information about estimated taxes in 2018. The problem as I see it is -- I have to pay the same amount for the second quarter April-May but there is one month less of paychecks that quarter. I was NOT expecting this at all, and now I am going to be substantially short on the tax payments unless I increase my withholdings dramatically in April/May. I know this is a cash flow problem as much a tax issue, but I really had no clue that the quarterly estimated payments were done evenly, even though the quarter periods are not even. The great accountant failed to inform me of this too, so now I have a major mess on my hands. Moreover, I was correct about the $2k shortfall as well. It would have been nice to know that I was right back in December so I could have taken a small amount out in December-April as opposed to having to come up with a big chunk now.

So two questions --

1.) What advice can you give me about how to balance out this cash flow issue? I keep running numbers over and over and it just seems like there is no way to slice or dice it other than you have this shortfall in the second quarter, but then a windfall in the final quarters. How do people smooth this out?

2.) With no offense meant to accountants and CPAs, what are really the value of these people when doing taxes? The whole racket with this very expensive accounting firm reminds me A LOT of the investment advisor racket. I feel like this accountant charged me a small fortune to plug some numbers into a computer program, and leave me on my own to figure out all of the hard, complicated stuff like cash flow. Is an accountant supposed to help with this? I feel like just with investment advisors, nobody cares as much about my money as I do.

DC3509
Posts: 236
Joined: Wed Jul 12, 2017 7:25 am

Re: Estimated Taxes Question -- Help!

Post by DC3509 » Mon Apr 16, 2018 1:06 pm

DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
All,

So I have been seething for the last 12 hours about some VERY unexpected tax problems. I would appreciate any advice from Bogleheads on this issue.

Bottom line -- I am paid entirely now through a K1 -- professional partnerships. My partnership "suggests" that we use a particular CPA firm, though it is not required. Almost entirely because of the recommendation, I decided to hire this firm, and pay roughly 3.5X what I have normally paid for my taxes. I was told they would provide tax planning, projections, etc.

The entire time I have found the accountant assigned to me to be less than helpful. I was projecting at the end of last year (last quarter was the first quarter I was paid on a K-1), that I was short by about $3K in what I had withheld. Being someone who carefully watches his expenses, this is A LOT of money to me. I was told by the accountant that he didn't follow my math, just make this end of year estimated payment, and don't worry about it.

Well, now, I get the information about estimated taxes in 2018. The problem as I see it is -- I have to pay the same amount for the second quarter April-May but there is one month less of paychecks that quarter. I was NOT expecting this at all, and now I am going to be substantially short on the tax payments unless I increase my withholdings dramatically in April/May. I know this is a cash flow problem as much a tax issue, but I really had no clue that the quarterly estimated payments were done evenly, even though the quarter periods are not even. The great accountant failed to inform me of this too, so now I have a major mess on my hands. Moreover, I was correct about the $2k shortfall as well. It would have been nice to know that I was right back in December so I could have taken a small amount out in December-April as opposed to having to come up with a big chunk now.

So two questions --

1.) What advice can you give me about how to balance out this cash flow issue? I keep running numbers over and over and it just seems like there is no way to slice or dice it other than you have this shortfall in the second quarter, but then a windfall in the final quarters. How do people smooth this out?

2.) With no offense meant to accountants and CPAs, what are really the value of these people when doing taxes? The whole racket with this very expensive accounting firm reminds me A LOT of the investment advisor racket. I feel like this accountant charged me a small fortune to plug some numbers into a computer program, and leave me on my own to figure out all of the hard, complicated stuff like cash flow. Is an accountant supposed to help with this? I feel like just with investment advisors, nobody cares as much about my money as I do.
I should also add -- this has caused me extreme mental anguish over the past 12 hours. I have been trying to put this in perspective, realize I do have money, etc., but as someone who PLANS and PLANS and PLANS -- having a surprise like this is a major issue!!! Just needed to vent to people who I think will understand.

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BolderBoy
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Re: Estimated Taxes Question -- Help!

Post by BolderBoy » Mon Apr 16, 2018 1:23 pm

DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
1.) What advice can you give me about how to balance out this cash flow issue? I keep running numbers over and over and it just seems like there is no way to slice or dice it other than you have this shortfall in the second quarter, but then a windfall in the final quarters. How do people smooth this out?
Download a copy of IRS Form 2210 (and instructions). Read it carefully and you will see that there are 4 ways to "pay estimated taxes" all of which qualify as safe harbors against underpayment penalties. The most common way is the "last year's tax liability divided by 4 paid this year in 4 equal installments when due". This is the method that TurboTax defaults to offering every year. This seems to be the method that you are objecting to, so keep reading.

One of the other options is to pay-as-you-go by carefully calculating your income-to-date (say, YTD to May 31), figure up your deductions YTD (as of May 31) and then to annualize your results to the whole year, figure the tax due at the end of the year, then figure the tax due per quarter (including the 2 month quarter you are concerned about) and pay only that amount due at the next quarterly filing date.

It is a rather laborious process; I used this technique for >20 years and never had a problem with underpayment of estimated taxes. But it requires filing a 2210 every year to prove you qualify for one of the safe harbor exceptions. Starting with 2018 I'm abandoning that method as I have better things to do with the time it takes and will simply use the, "last year's tax liability divided by 4..." method I mentioned above. So some years I'll overpay and some years underpay total taxes due going forward, but I won't have an underpayment penalty in any event. Cest la vie...
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

DC3509
Posts: 236
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Re: Estimated Taxes Question -- Help!

Post by DC3509 » Mon Apr 16, 2018 1:57 pm

BolderBoy wrote:
Mon Apr 16, 2018 1:23 pm
DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
1.) What advice can you give me about how to balance out this cash flow issue? I keep running numbers over and over and it just seems like there is no way to slice or dice it other than you have this shortfall in the second quarter, but then a windfall in the final quarters. How do people smooth this out?
Download a copy of IRS Form 2210 (and instructions). Read it carefully and you will see that there are 4 ways to "pay estimated taxes" all of which qualify as safe harbors against underpayment penalties. The most common way is the "last year's tax liability divided by 4 paid this year in 4 equal installments when due". This is the method that TurboTax defaults to offering every year. This seems to be the method that you are objecting to, so keep reading.

One of the other options is to pay-as-you-go by carefully calculating your income-to-date (say, YTD to May 31), figure up your deductions YTD (as of May 31) and then to annualize your results to the whole year, figure the tax due at the end of the year, then figure the tax due per quarter (including the 2 month quarter you are concerned about) and pay only that amount due at the next quarterly filing date.

It is a rather laborious process; I used this technique for >20 years and never had a problem with underpayment of estimated taxes. But it requires filing a 2210 every year to prove you qualify for one of the safe harbor exceptions. Starting with 2018 I'm abandoning that method as I have better things to do with the time it takes and will simply use the, "last year's tax liability divided by 4..." method I mentioned above. So some years I'll overpay and some years underpay total taxes due going forward, but I won't have an underpayment penalty in any event. Cest la vie...
Thank you. This is the annualized installment method, right? I read somewhere that it should only be used "if you didn't receive your income evenly throughout the year" -- that is somewhat true for me because about 1/4 of my income comes in the form of a bonus at year end. And then there is this Q2 versus Q1 issue when there is a major difference in the income in those quarters. Should I just ask the accountant to calculate everything using that method?

Gill
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Re: Estimated Taxes Question -- Help!

Post by Gill » Mon Apr 16, 2018 2:08 pm

DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
...so now I have a major mess on my hands.
Do you really have a "major mess" or is the only problem that you didn't know estimated payments were made April, June, September and January? I would think you could somehow adjust your cash flow or borrow from Peter to pay Paul in order to make the four payments on their due dates. I can understand how the accountant wouldn't have thought to mention this as he probably thought everyone on a K-1 making estimated payments would probably know that. Aren't you an attorney?
Gill

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BolderBoy
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Re: Estimated Taxes Question -- Help!

Post by BolderBoy » Mon Apr 16, 2018 2:16 pm

DC3509 wrote:
Mon Apr 16, 2018 1:57 pm
Thank you. This is the annualized installment method, right? I read somewhere that it should only be used "if you didn't receive your income evenly throughout the year" -- that is somewhat true for me because about 1/4 of my income comes in the form of a bonus at year end. And then there is this Q2 versus Q1 issue when there is a major difference in the income in those quarters. Should I just ask the accountant to calculate everything using that method?
You can use this method if your income varies by 1 cent per IRS quarter, if you want. It is a real pain to do the calculations. You can ask your accountant to do it this way - she'll charge you handsomely for it.

Personally, looking back, I should have simply used the "4 equal payments based on last year's tax liability" method, and spent the time saved doing other things.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

DC3509
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Re: Estimated Taxes Question -- Help!

Post by DC3509 » Mon Apr 16, 2018 2:30 pm

Gill wrote:
Mon Apr 16, 2018 2:08 pm
DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
...so now I have a major mess on my hands.
Do you really have a "major mess" or is the only problem that you didn't know estimated payments were made April, June, September and January? I would think you could somehow adjust your cash flow or borrow from Peter to pay Paul in order to make the four payments on their due dates. I can understand how the accountant wouldn't have thought to mention this as he probably thought everyone on a K-1 making estimated payments would probably know that. Aren't you an attorney?
Gill
I knew there were estimated payments due; I did not know that you have to pay 6 months of taxes off of 5 months of income in the first part of the year. If I would have known that, I would have adjusted my cash flow differently.

magicrat
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Re: Estimated Taxes Question -- Help!

Post by magicrat » Mon Apr 16, 2018 2:51 pm

My CPA tells me what my estimated tax payments should be and gives me the coupons (or whatever they're called). He doesn't do my budgeting for me. YMMV.

Gill
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Re: Estimated Taxes Question -- Help!

Post by Gill » Wed Apr 18, 2018 9:17 am

DC3509 wrote:
Mon Apr 16, 2018 2:30 pm
Gill wrote:
Mon Apr 16, 2018 2:08 pm
DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
...so now I have a major mess on my hands.
Do you really have a "major mess" or is the only problem that you didn't know estimated payments were made April, June, September and January? I would think you could somehow adjust your cash flow or borrow from Peter to pay Paul in order to make the four payments on their due dates. I can understand how the accountant wouldn't have thought to mention this as he probably thought everyone on a K-1 making estimated payments would probably know that. Aren't you an attorney?
Gill
I knew there were estimated payments due; I did not know that you have to pay 6 months of taxes off of 5 months of income in the first part of the year. If I would have known that, I would have adjusted my cash flow differently.
Just so the crisis doesn't come up again, you should know the third payment is due September 15 which also represents, using your description, "9 months of taxes off of 8 months of income".
Gill

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FiveK
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Re: Estimated Taxes Question -- Help!

Post by FiveK » Wed Apr 18, 2018 3:20 pm

DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
I was NOT expecting this at all, and now I am going to be substantially short on the tax payments unless I increase my withholdings dramatically in April/May.
If by "withholdings" you do mean "tax withheld" (as opposed to "estimated tax paid") then you have all year to get the correct amount of withholding. If the amount withheld alone gets you into one of the safe harbors, then it doesn't matter when the income and/or withholding occurs.

wrongfunds
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Re: Estimated Taxes Question -- Help!

Post by wrongfunds » Wed Apr 18, 2018 3:37 pm

Don't take this the wrong way but if your mental health has been affected by having to come up with $2K on short notice even though you do have the money, you really need to do little bit more soul searching.

To be perfectly honest, one year I too forgot that Sep 15 deadline but sent the check before the end of the month. I did not go to jail that year :-)

So relax!!

DouroBound
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Re: Estimated Taxes Question -- Help!

Post by DouroBound » Wed Apr 18, 2018 4:33 pm

DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
1.) Starting with 2018 I'm abandoning that method as I have better things to do with the time it takes and will simply use the, "last year's tax liability divided by 4..." method I mentioned above. So some years I'll overpay and some years underpay total taxes due going forward, but I won't have an underpayment penalty in any event. Cest la vie...

That's how I do it as well. There are plenty of other aspects of the tax code that make my blood boil and cost me hours of anguish each year ... I choose not to let estimated tax calculations be one of them.

cherijoh
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Re: Estimated Taxes Question -- Help!

Post by cherijoh » Wed Apr 18, 2018 4:58 pm

DC3509 wrote:
Mon Apr 16, 2018 2:30 pm
Gill wrote:
Mon Apr 16, 2018 2:08 pm
DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
...so now I have a major mess on my hands.
Do you really have a "major mess" or is the only problem that you didn't know estimated payments were made April, June, September and January? I would think you could somehow adjust your cash flow or borrow from Peter to pay Paul in order to make the four payments on their due dates. I can understand how the accountant wouldn't have thought to mention this as he probably thought everyone on a K-1 making estimated payments would probably know that. Aren't you an attorney?
Gill
I knew there were estimated payments due; I did not know that you have to pay 6 months of taxes off of 5 months of income in the first part of the year. If I would have known that, I would have adjusted my cash flow differently.
It sounds like you are running way too close to the wind in terms of cash flow if you are flipping out in mid-April about a payment that isn't due until June 15th. Now is the time to cut back on your spending and start building up a bigger reserve fund. You will know next year to save some of your year-end bonus so that you aren't faced with the same situation in the future.

chicagoan23
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Re: Estimated Taxes Question -- Help!

Post by chicagoan23 » Wed Apr 18, 2018 5:13 pm

It seems to me that you should give this accountant a raise. You didn't have to pay in December what you are now paying in April towards your 2017 tax liability, so you have had the use of that money for four months longer than you would have if you were the one computing estimates. You also didn't overpay on your estimates, as you are not getting a refund. Kudos to him.

For a partner on a K-1 who pays estimates, it usually takes about a full year or two before you get used to the cash flow issues that come from being a partner. You are flush at certain times of the year and you are tight at other times. Once you get used to it, it will feel like second nature. You smooth it out by keeping enough cash on hand to deal with it.
I knew there were estimated payments due; I did not know that you have to pay 6 months of taxes off of 5 months of income in the first part of the year. If I would have known that, I would have adjusted my cash flow differently.
Didn't you pay three months of taxes off four months of income for your first estimate, due ~April 15? You get a free month from the IRS on that side, and lose that month on the June 15 estimate.
DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
2.) With no offense meant to accountants and CPAs, what are really the value of these people when doing taxes? The whole racket with this very expensive accounting firm reminds me A LOT of the investment advisor racket. I feel like this accountant charged me a small fortune to plug some numbers into a computer program, and leave me on my own to figure out all of the hard, complicated stuff like cash flow. Is an accountant supposed to help with this? I feel like just with investment advisors, nobody cares as much about my money as I do.
This is largely correct. You can do your own taxes (I do) and save the fees on the CPA charges. It takes time, but it seems like you are willing to do that. I would not use a CPA if I were you.

MathIsMyWayr
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Re: Estimated Taxes Question -- Help!

Post by MathIsMyWayr » Wed Apr 18, 2018 10:39 pm

FiveK wrote:
Wed Apr 18, 2018 3:20 pm
DC3509 wrote:
Mon Apr 16, 2018 1:05 pm
I was NOT expecting this at all, and now I am going to be substantially short on the tax payments unless I increase my withholdings dramatically in April/May.
If by "withholdings" you do mean "tax withheld" (as opposed to "estimated tax paid") then you have all year to get the correct amount of withholding. If the amount withheld alone gets you into one of the safe harbors, then it doesn't matter when the income and/or withholding occurs.
In another thread, I was helped out by FiveK on a similar topic. Tax withheld is a big savior from headaches for me. On what kinds of income can one ask for withholding besides W-2 income (practically no limit including additional withholding) and social security (up to 22%)?

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