Estimated taxes

To keep it simple.... you have to be paid in 90% of 2014 taxes by year-end or 100% of your 2013 tax bill or owe no more than $1000. Pick the one that provides your safe harbor from owing an estimated tax penalty. If your 2014 withholding will not equal 90% of 2014 or 100% of

2013 taxes, then you should make estimated payments to avoid the penalty or increase your withholding between now and year-end to get you to the safe harbor.

No, there's no problem. It's perfectly normal to start paying estimated tax for the quarter in which the income starts.

No. You can stop at any time.

Bob Sandler

Just to clarify, we have no withholding because we are both retired and do not work. We also have never filed or paid estimated taxes. Most of our investments are in IRAs, Roths or other tax-free instruments. We have a small amount of taxable income, but we also have bank accounts which have already been taxed that we can draw upon as needed. We have fairly large medical deductions, and we always make sure that we have enough taxable income each year so that when combined with deductions and credits, our tax bill to the government is always under $1000.

In this year 2014, we withdrew around $32,000 in IRA money earlier in the year (in a lump-sum February) but did not file any estimated taxes because we knew by the end of the year our deductions would be large enough to keep our tax bill for the year under $1000. We had some other small amounts of income during the year, but the 32K was the biggest chunk. Our deductions are spread out throughout the year. We carefully calculated the 32K withdrawal based on our estimate of remaining income and deductions for the full year.

But now we have the possibility of unexpected income in the amount of $10,000 for a consulting assignment over the next two months. The question is....is there any way for us to file and pay estimated taxes now and through the end of 2014 so as to avoid any kind of tax penalty next April? We did not file in earlier quarters because our full-year estimate was that we wouldn't owe more than $1000.

On 2014-07-27 21:35, Lewis J. wrote: [...]

Please also note, while the term "penalty" sounds ominous, it's really just a late interest charge, applied only to the part of the year for which additional payments were not sent.

For example, if your total tax underpayment for the year is $1,000 (as calculated on Form 2210), for 2013 tax year you would only pay a $20 interest charge (nominally a penalty), and in fact if you were to leave that off your return in lieu of letting the IRS calculate it for you, which is allowed, in my experience they would not even bother to send you a bill.

Some taxpayers would reasonably conclude in this case that the $20 they might not even have to pay is less than the value of their time and effort to calculate and track estimates.

Oh, and don't forget your state estimated payments as well, which will be based solely on income, without the self-employment tax component included on the federal side.

On 7/27/2014 23:35, Lewis J. wrote: The question is....is there any way for us to

The Estimated Tax penalty accrues at the prevailing IRS interest rate from the due date of the payment (4/15, 6/15,

9/15, 1/15) to the earlier of the date of payment or 4/15 of the following year. If you missed required quarterly payments, you are already incurring the penalty. It can be mitigated by making past due payments ASAP.

On 2014-07-28 08:05, paultry wrote: [...]

We don't have enough information to determine whether or not the annualized method would avoid the "penalty". He said deductions are spread "evenly" throughout the year, but if there are property tax, charitable, and state income tax deductions, most likely those were not even throughout the entire year. The income certainly appears not to be spread evenly through the year.

I'd advise this taxpayer to make quarterly IRA distributions, instead of all at once in February. Or, just get in the habit of having some withholding routinely made on any IRA distributions, especially if/when Social Security taxable income begins.

On 7/27/14, 10:35 PM, Lewis J. wrote: [SNIP]

Let's assume you planned on owing $800. Let's assume that you have no business expenses against your $10,000 of SE income. You will owe the feds $1500 on that $10K in income taxes. You will owe SE tax of ~$1300. That comes to an additional $2800. If you make the 3Q est. payment in Sept. and the 4Q payment in Jan. of $1400 each you will once again only owe ~$800 and you will NOT receive any letter from the IRS regarding a penalty for failure to pay timely estimated tax.

P.S. for you mathematicians: The $1300 was calculated using the formula (X*.9235*.153) - ((X*.9235*.153)/2)*R where X is net income from SE and R is the marginal tax rate. X was assumed to be $10K and R was 15%. Result was rounded to $1300.