2014 estimated tax payments

I've eliminated the need to do estimated taxes completely by having taxes withheld my Social Security, Pensions and IRA Distributions. I've done this for both Federal and State. It's a lot easier than worrying about estimated taxes due dates. If you set the withholding up as a percentage, it will result in variable taxes based on the gross payments received. When you receive you various tax documents at tax return preparation time, the amount withheld will show as already paid. This really simplifies my life.

Hi, Al.

As I've mentioned often here, I have been retired for about a quarter-century and many rules have changed since then, so be sure to check this out with your own CPA, but...

There are TWO sets of rules about estimated taxes and penalties for not paying enough soon enough:

1. Rules for what is required, and
2. Exceptions to the rules for avoiding the underpayment penalty.

The exceptions are much more forgiving than the first set of rules. Even if you did not comply with the rules, use Form 2210 (and its instructions) to see if any penalty is wiped out or reduced by the exceptions.

For example, while level payments are required by the rules, if the bulk of your income arrives after August 31, you may be able to avoid penalties on underpayment of the first 3 quarters, cutting the penalty by 75%. And, even if your tax doubles or triples this year, if you estimate and timely pay at least as much as last year's tax, that will eliminate the penalties for all

4 quarters. (This exception is less helpful if you expect this year's tax to be much LESS than last year's.) If your tax is WITHHELD, as opposed to paid as estimated tax, you can consider it as having been withheld evenly over the year, which will in many cases eliminate the penalty for at least some of the quarters.

Figuring out whether these exceptions apply in your case for this year can be easy - or a lot of work - depending on your specific circumstances for the year. But I've used them to avoid lots of penalties for clients. As I said, be sure to check to see which exceptions might apply to you for each quarter of each year.

Or just be sure to timely pay at least 1/4 of last year's tax for each quarter this year. Then you can relax - until next year.

RC

-- -- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken Deluxe 2014 R 7 and Windows Live Mail in Win8.1 x64)

[Using Qkn Dlx 2014 R7 & TTax Dlx 2013 on Vista Ultimate SP2]

BACKGROUND: At end of 2013 Ttax process, blew past 2014 calculations not remembering that (1) another person will start taking required minimum distributions in 2014 (2) that person decided to take it all in January of 2014 instead of spreading amounts evenly throughout the year.

Went back to both Ttax and Qkn's Tax Planning, and entered estimates for

2014 on income and deductions to obtain estimate of new 2014 total tax. Got two slightly different - but still in ballpark - calculated yearly taxes.

Remember some years ago almost getting whacked by the IRS for having paid estimated taxes evenly through the year when we wound up having a big (unexpected at beginning of year) income spike in 4th quarter when FI sold some stuff at end of year that yielded big gains.

QUESTION: So, any ideas on programming our 2014 estimate payments? Should we... (a) pay new amount in even quarterly payments? (b) subtract old tax estimate from new, then pay old amount in even quarterly payments BUT add the difference between old and new to the first (April 2014) payment? (c) some other ideas you come up with?

Thanks.

Many thanks to Richard and RC on their approaches. As a matter of fact, my wife has amounts withheld from her pension. Everything else is received in whole and year-end tazes/refunds resolved between Ttax calculations, amount s wirhheld, and estimated quarterly payments. Our preference is to figure o ut things so as to pay a little $100 to $200, or less, at year-end or get b ack just a bit in refunds.

I'll noodle the withholding at all income sources, and see what the RC appr oach augurs.

(As my wife does not read this forum I can 'fess that the "another person" in my OP is me, as a workaround to blurting out I am a titch younger than m y wife, already receiving her minimum distributions. Shhh, please!)

Like you, I don't do estimated payments. As a retiree, my company lets me go on line and adjust the amount being withheld from my pension. I can adjust monthly any time before the 15th but usually make the changes two or three times a year depending on how much capital gain there is from stock sales. My goal is to end up owing the IRS less than about $200 at tax time. Using this approach, I never have to file an Estimated Tax form and as you say it "really simplifies my life"

RC - question. Are you saying that you can't mail during the course of the year 4 differing 1040-Vs (quarterly payments) to the IRS? That indeed they all have to be the same dollar amount?

Not that I have, but I assumed if I came across a windfall during the year (for example, sold a lot of stock for a gain) and wished to pay a fixed amount of taxes during that quarter, I could do so to avoid having to pay the piper all at once at tax time later. So I was assuming I could give them differing amounts during the year as 'quarterly'.

No??

Hi, Andrew.

No, As I said, there are TWO sets of rules. The actual requirement is for 4 level payments. But...

If we don't meet that criterion, then we look to see if there is an exception that will void any penalty for such failure - and there are several exceptions that might fit.

One of those several exceptions lets us calculate the tax that would be due if our Year To Date facts (income, deductions and other factors) were for the whole year. By YTD, we mean to the month-end before each installment (March 31 for the April estimate, May 31 for June, August 31 for September) and this exception doesn't apply for the January-of-next-year installment. If we have paid in as much as the tax on that YTD income, we can avoid the penalty for that quarter. And since we can use our full-year exemptions, even for our part-year tax calculations, we can often eliminate at least the first quarter's penalty. See the lengthy instructions for Form 2210 for details and instructions.

And remember, unexpected events late in the year can include large losses and deductions, as well as windfall gains. Maybe you won't need to make large final estimates, after all.

It's worth noting, of course, that "quarter" is used loosely here. The first quarter is 3 months, the second "quarter" only 2, the third is 3 and the final "quarter" is 4 months. (We old guys can barely remember when March 15 - The Ides of March - was the due date for Form 1040. And the final installment was moved from December to January since it was so near the end of the year.) But the required estimates - and payments - are the full year's estimated tax divided into 4 equal amounts.

In many cases, the easiest way to insure against a penalty is what I suggested before: Estimate at least as much as this year's tax and pay that in equal installments.

The rules are simple - and often unfair. The exceptions are more fair and forgiving - and complicated.

RC

-- -- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken Deluxe 2014 R 7 and Windows Live Mail in Win8.1 x64)

R. C. White wrote:

RC - question. Are you saying that you can't mail during the course of the year 4 differing 1040-Vs (quarterly payments) to the IRS? That indeed they all have to be the same dollar amount?

Not that I have, but I assumed if I came across a windfall during the year (for example, sold a lot of stock for a gain) and wished to pay a fixed amount of taxes during that quarter, I could do so to avoid having to pay the piper all at once at tax time later. So I was assuming I could give them differing amounts during the year as 'quarterly'.

No??

But calculating the capital gains/losses every quarter to make adjustments seems more trouble than simply paying last year's taxes in 4 equal estimated payments. No? One TTax calculation instead of 4 to avoid penalties.

I'm not criticizing. Just trying to figure out the best way to proceed.

I don't actually adjust very often. I set my tax deductions from my pension to be at least equal to what I paid last year. Ordinarily, I don't have to make any changes all year long. However, if I have a big capital gain and want to increase my withholding, I can do it but I don't have to.

Interesting - thank you for your as usual great answer; I will digest when (and if) I do have such a windfall! As I had said, it was a hypothetical answer. I do know that Turbotax asks the specific dates and amounts of the quarterlies, so it 'knows' all the rules, I am trusting.

Thanks again.

Arnie Goetchius wrote in news:lh50mi$hlk$ snipped-for-privacy@dont-email.me:

I used to use a spreadsheet program where you enter your tax data quarterly, and it would compute all the options and give you the lowest required payment. The guy who sold it quit updating it in

2012. I typically figure my estimates using the Annualized Income method to see if I can get away with less than using the prior year tax liability safe harbor. I'm not good at predicting current year total liability so don't use that, except maybe for the 15 Jan payment. I've never tried the "modify witholding" method -- too much hassle, just cut a check for what I need to get good for the quarter. In the worst case I'm off a few bucks and end up paying $20-$30 on the 2210. The IRS does charge excessive interest.

scott s. .

With my method, I never have to fill out and mail a 2210 and never have to write a check. If I'm lucky, I get it right the first time in January. This year I guessed wrong and will have to make a one time adjustment to my withholding in April.