IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

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SovereignInvestor
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IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by SovereignInvestor » Fri Feb 22, 2019 10:17 pm

I am helping my mother do conversions from Traditional IRA to Roth before she turns 70.

Aside from normal income, which normally has the proper amount of tax withheld, in 2017 she converted 25K to ROTH and being in the 25% bracket, the amount of tax owed was about $6250, so I immediately had her send the IRS a payment after the conversion was complete in December 2017.

But since the IRS saw the need for payment in 2017, they gave her vouchers to make estimated payments of around $1500/quarter for 2018.

She didn't pay them because she didn't plan on doing any conversions in 2018, but then in December 2018 she converted $30K to ROTH, and she immediately sent the IRS a payment for the $7200 since she is in 24% bracket for 2018.

Even though the IRS actually owes her about $500 for 2018, they say she owes a small penalty. (under $100) I don't understand how, since although she didn't make the quarterly payments for 2018, there was no timing issue--when she incurred the massive liability in Q4 with conversion which spiked income, she immediately made a payment to them in full.

So now going into 2019, she has vouchers for around $1750 per quarter. Even if she has no intention of doing a ROTH conversion for 2019, and otherwise she would likely be owed a few hundred dollars at end of 2019 due to pension withholding being above what it should be, would she pay a penalty because she didn't pay 2019 estimated payments?

The estimated 2019 payments are based on her artificially high income for 2017-18 when she did conversions, and if that isn't persisting, and she doesn't pay it in 2019, will she be penalized? Otherwise, she would have to come up with $8K to give to the IRS for these payments?

PS: I know she can withhold taxes on IRA conversion but she didn't because she wants to maximize the amount in ROTH, and would rather use taxable money to pay the taxes rather than burning through money in IRA which otherwise could eventually go to ROTH.

Silk McCue
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by Silk McCue » Fri Feb 22, 2019 10:28 pm

If she isn’t going to do a Roth conversion this year and has sufficient withholding she does not need to do estimated payments. Period. For her $100 penalty you should be able to use your tax software to document quarterly income and taxes paid including the December Roth conversion and payment. It may eliminate fully the penalty or at least reduce it.

She shouldn’t shy away from doing conversions because of this.

Cheers

Katietsu
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by Katietsu » Fri Feb 22, 2019 10:28 pm

The IRS does not know what month the Roth conversion happened. You can use form 2210 to report to the IRS how much income was received and tax was due in each quarter. This should eliminate the underpayment penalty.

You can not just point out when the Roth conversion took place. If she just has income paid out equally per month and takes the standard deduction, then this is easy. For people with uneven income, this can be quite a hassle.

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FiveK
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by FiveK » Sat Feb 23, 2019 2:11 pm

SovereignInvestor wrote:
Fri Feb 22, 2019 10:17 pm
Even though the IRS actually owes her about $500 for 2018, they say she owes a small penalty. (under $100)
Define "they" in "they say". Did she get a note from the IRS, or is it a message from the tax software she is using?

As already noted, using form 2210 should (based on what you describe) resolve the issue and eliminate the penalty.

sawdust60
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by sawdust60 » Sat Feb 23, 2019 2:58 pm

I send in Form 2210 when estimated tax payments were made, other than 4 equal payments. There are reasons why it would not be necessary, such as if the only payment was the first one.

One way to avoid this with RMD is to withhold at higher rates from the RMD, and then 0% on the Roth conversion. If all taxes are from withholding, you won't need to send Form 2210 to demonstrate that taxes were paid timely.

24% is also IRMAA territory; perhaps you're aware and just filling up the bracket.

shellboy
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by shellboy » Sat Apr 13, 2019 7:27 am

I have a similar issue. Did a Roth conversion on Dec. 7 and paid estimated tax separately on Dec. 7. Did not file Form 2210. Just got IRS Notice of penalty of ~$100. Couple of questions.


1) Can I file a Form 2210 only now and get penalty eliminated? (Will probably just pay penalty, but would prefer to keep the $100)

2) If I do a late Roth conversion in 2019, make a separate est. tax payment, and file with a Form 2210, would that eliminate a penalty for 2019?

3)If I do a Roth conversion late in 2019, but pay the taxes through Fidelity from a separate taxable account, would that appear to the IRS that the taxes were paid throughout the year?

The Wizard
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by The Wizard » Sat Apr 13, 2019 8:50 am

shellboy wrote:
Sat Apr 13, 2019 7:27 am

1) Can I file a Form 2210 only now and get penalty eliminated? (Will probably just pay penalty, but would prefer to keep the $100)
Yes.

2) If I do a late Roth conversion in 2019, make a separate est. tax payment, and file with a Form 2210, would that eliminate a penalty for 2019?
Yes.

3)If I do a Roth conversion late in 2019, but pay the taxes through Fidelity from a separate taxable account, would that appear to the IRS that the taxes were paid throughout the year?
Maybe!.
Last edited by The Wizard on Sat Apr 13, 2019 9:30 am, edited 1 time in total.
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The Wizard
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by The Wizard » Sat Apr 13, 2019 9:12 am

sawdust60 wrote:
Sat Feb 23, 2019 2:58 pm

...24% is also IRMAA territory; perhaps you're aware and just filling up the bracket.
Correct, which is why some of us do Roth conversions in December after we have a good idea what our total AGI/MAGI for the year will be. The idea is to do a Roth conversion to get up close to the next IRMAA threshold, but not over it.

I also sent in a single estimated tax payment in December but it turned out that my withholding from retirement income streams came to 86% of my total tax, so I didn't have to file a 2210 for 2018 to avoid a penalty...
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shellboy
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by shellboy » Sat Apr 13, 2019 9:24 am

If I pay taxes through Fidelity from the IRA withdrawal it doesn't seem to be an issue and no Form 2210 required. I assumed this was because it was treated as paid throughout the year. Is that correct?

If so, why would withdrawing from a Fidelity taxable account and having Fidelity send to IRS be different? Just curious.

Yes, I was watching IRMAA threshold.

The Wizard
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by The Wizard » Sat Apr 13, 2019 9:37 am

shellboy wrote:
Sat Apr 13, 2019 9:24 am
If I pay taxes through Fidelity from the IRA withdrawal it doesn't seem to be an issue and no Form 2210 required. I assumed this was because it was treated as paid throughout the year. Is that correct?

If so, why would withdrawing from a Fidelity taxable account and having Fidelity send to IRS be different? Just curious.
Okay, I see what you're saying.
Yes, if Fidelity will do a specified WITHHOLDING for you, then yes, that would work.
But do custodians allow one to "withdraw" $3000, say, from your mutual fund account and then send it entirely to the IRS as a withholding?
People do this quite often with RMDs, but that's a tax-deferred account transaction...
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kaneohe
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by kaneohe » Sat Apr 13, 2019 9:40 am

The Wizard wrote:
Sat Apr 13, 2019 9:12 am
................................................

I also sent in a single estimated tax payment in December but it turned out that my withholding from retirement income streams came to 86% of my total tax, so I didn't have to file a 2210 for 2018 to avoid a penalty...
I thought you still had to file 2210 but not the Sch AI: from the 2210 instructions........

"Tax reform waiver. If you are an individual taxpayer and you would otherwise owe an estimated tax penalty, the IRS will waive the penalty under certain conditions. ....................................). If you would otherwise owe a penalty, complete the 80% Exception Worksheet below to see if you meet the conditions to be eligible to claim the waiver. If so, you must check Box A in Part II, write "80% Waiver" next to Box A, and file page 1 of Form 2210 with your return to request the waiver"

The Wizard
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by The Wizard » Sat Apr 13, 2019 10:11 am

kaneohe wrote:
Sat Apr 13, 2019 9:40 am
The Wizard wrote:
Sat Apr 13, 2019 9:12 am
................................................

I also sent in a single estimated tax payment in December but it turned out that my withholding from retirement income streams came to 86% of my total tax, so I didn't have to file a 2210 for 2018 to avoid a penalty...
I thought you still had to file 2210 but not the Sch AI: from the 2210 instructions........

"Tax reform waiver. If you are an individual taxpayer and you would otherwise owe an estimated tax penalty, the IRS will waive the penalty under certain conditions. ....................................). If you would otherwise owe a penalty, complete the 80% Exception Worksheet below to see if you meet the conditions to be eligible to claim the waiver. If so, you must check Box A in Part II, write "80% Waiver" next to Box A, and file page 1 of Form 2210 with your return to request the waiver"
Yes, I think you're exactly right. My tax software (FreeTaxUSA) did this for me and it was still 85% waiver back in February.
But I didn't have to fill out the part that would justify my fourth quarter estimated payment...
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Lyrrad
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by Lyrrad » Sat Apr 13, 2019 11:39 am

shellboy wrote:
Sat Apr 13, 2019 7:27 am
I have a similar issue. Did a Roth conversion on Dec. 7 and paid estimated tax separately on Dec. 7. Did not file Form 2210. Just got IRS Notice of penalty of ~$100. Couple of questions.


1) Can I file a Form 2210 only now and get penalty eliminated? (Will probably just pay penalty, but would prefer to keep the $100)
One could reduce or eliminate the penalty if the taxable income is weighted towards later quarters using Form 2210 Schedule AI. This allows one to d taxes an extra 3 times to calculate the underpayment on a quarter by quarter basis.

kaneohe
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by kaneohe » Sat Apr 13, 2019 1:02 pm

shellboy wrote:
Sat Apr 13, 2019 7:27 am
I have a similar issue. Did a Roth conversion on Dec. 7 and paid estimated tax separately on Dec. 7. Did not file Form 2210. Just got IRS Notice of penalty of ~$100. Couple of questions.


1) Can I file a Form 2210 only now and get penalty eliminated? (Will probably just pay penalty, but would prefer to keep the $100)

.............................................
Did you pay 80% of your yrs taxes by w/h and estimated tax? This yr you can get a waiver of penalty if you file p.1 of 2210.
I assume ? if you filed the 2210 after the penalty was assessed that would also apply....but not sure.
Be sure to read instruction about that special waiver before filling form out.

shellboy
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Re: IRS Estimated Tax Payments on ROTH conversion & Avoiding Penalties

Post by shellboy » Sun Apr 14, 2019 7:52 am

The 80% was not enough to save me either. I have now completed a Form 2210 using exception C and recalculated my income and taxes using AI. It now shows I owe no penalty. I checked boxes A and C and will submit form and request waiver of penalty. Given the amount of work to complete a Form 2210, maybe just paying the $100 penalty would have been the better path. However, I enjoy doing my taxes without software assistance and it was a learning experience. I should have caught this when doing my taxes but was more focused on the new rules and forms.

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