Estimated taxes

Tarwheel

I dutifully paid estimated taxes on my Roth IRA conversion last year and ended up getting a tax refund for essentially the same amount that I prepaid. My earnings this year have changed very little this year, so I expect similar results at tax time. Is there any requirement to pay estimated taxes if you aren’t likely to owe the estimated amount?

I’m wondering about this because I did half of my Roth conversion in late spring, thinking that estimated taxes for the second quarter would be due in mid-July. But after downloading the tax form, I realized that estimated taxes are due in mid-June for the second quarter. I don’t know why the IRS would schedule the second estimated tax payment a month earlier than the other payments, but they do. So my estimated payment would be late, even though I’m likely to be refunded the amount next year. Does that make sense?

yogibearbull

Estimated taxes are for those situations when the annual tax withholdings may be much lower than taxes due.

Taxes withheld, from pay/pension checks or Roth IRA conversions, count as being spread over the entire year. So, if one does some Roth Conversions late in the year, one can withhold a lot (even 100%). One can also do this by adjusting tax withholding on 401k/403b contributions by calling HR.

Double-check this info as I am not a tax professional, nor pretend to be one on the Internet (-:).

msf

If that late spring conversion was in June (summer began June 21st this year), then the taxes would come under the third quarter (Sept) estimate not the second quarter (June) estimate.

If without the estimated payment you'll still have paid in enough to cover taxes for the year, then you should be fine. There's no requirement to overpay taxes, just to pay them in a timely manner. That usually means making equal payments regardless of when you generated income. As Yogi noted, taxes that are withheld are generally assumed to apply evenly over the entire year.

For peace of mind you can make an estimated payment now. Worst case, if that payment was necessary to cover your taxes, then you'll owe interest on the time between when the estimate was due (June 15th) and the time you made the payment. So the sooner you cover the shortfall, the better. (The actual amount of the penalty may be petty; I've never looked at the dollar or percentage figures.)

See Worksheet for Form 2210 that shows penalty calculation is based on number of days between time underpayment occurred (i.e. when estimate was due) and time payment was made.
https://www.irs.gov/instructions/i2210#f63610i01

Sven

Still think you are okay to pay in the 3rd quarterly estimate.

When to and how to change your withholding or pay estimated taxes
Check your withholding often and adjust it when your situation changes. To do this fill out a new Form W-4 and give it to your employer. The Tax Withholding Estimator is a helpful tool.

Estimated tax payments are due as follows:

January 1 to March 31 – April 15
April 1 to May 31 – June 15
June 1 to August 31 - September 15
September 1 to December 31 – January 15 of the following year

https://irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty

Tarwheel

I’m planning to pay the estimated tax by September 15, but I’m still confused about the requirements for Roth conversions. I usually do my conversions in October, so I pay the estimated taxes in January of the following year. However, I’ve done two of them this year — one in May and the other in July — to take advantage of the bear market. FWIW, my wife and I both receive pensions and withhold more than enough to cover our taxes from those payments. Last year, my federal tax refund was about the same amount I paid in estimated taxes, so I don’t understand the point of them.

msf

FWIW, my wife and I both receive pensions and withhold more than enough to cover our taxes from those payments.

That's all you need. If withholdings cover taxes, you do not have to make any estimated payments.

Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

https://www.irs.gov/taxtopics/tc306

Sven

IRS likes to get their tax throughout the year, not at year end. This is no difference with having too high of withholding and getting a large refund -essentially give Uncle Sam a free loan on your tax dollar. Unexpected large mutual fund year end distribution is where it get sticky.

BTW, you have done well with your Roth conversion this year.

Tarwheel

Yes, the Roth conversions were well timed. Both have increased in value significantly since the conversions, so far anyway.

msf

Unexpected large mutual fund year end distribution is where it get sticky.

True enough. Though Uncle Sam doesn't require you to pay taxes on money earned faster than you make it. If you have large YE distributions, Uncle Sam is fine with your paying more in the fourth quarter. You "just" have to document your uneven income in Schedule AI of Form 2210.

Over the past several years with cash paying nothing it hasn't been worth it to hold onto that extra money for a quarter or two, and sending it in with the fourth quarter estimate. But now with MMFs paying real interest, it may be worth a second look at paying in estimates as necessary rather than evenly.