when is estimate tax due
I am retired and withdrew $50,000 in Jan 2024 on my IRA account and withheld $3,000 from 2023 IRS refund as estimate tax. I delayed my SS benefit and my spouse is on SS benefit. My estimate federal tax is around $3,700 based on our current income (married join filing) of $67,000. I plan to withdraw another $30,000 (lowest bracket for income tax benefit) on my IRA in Dec 2024. I thought I can make payment in 4th quarter that due in Jan 2025.
I read on the internet that the IRS will spread all my 2024 income ($97,000) into 12 months instead. In that case I will miss the estimate tax on second and third quarters. My estimate federal tax will be around $7,300 for $97,000 income. My estimate tax due on each quarter will be $1825 that the $3,000 should cover the first and possible second quarter without penalty. I read the penalty will be around 8% (which is $1825x2x8%=$292)
Is my assumption correct and what is your advice? My option is not withdraw another $30,000. Thank you.
Answers
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Midpoint,
That is a great question!
When determining an estimated tax penalty, the IRS will assume your income and withholding were even throughout the year. However, you can use the annualized income installment method. This may reduce the penalty if your income varies during the year, which yours does. This method is on page 3 of Form 2210. It can be tricky to figure by hand, so I do recommend entering estimates of your income and withholding within our 2024 software. You can then use our software to determine the penalty based on the annualized method.
https://www.irs.gov/pub/irs-pdf/f2210.pdf
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I did use the 2024 software under the Misc.
Did you apply your 2023 federal tax refund to your 2024 federal tax return? yes
Did you make estimated tax payments for your 2024 federal tax return? no
Enter the amount of any 2023 federal tax refund that you applied to your 2024 federal tax return: 3000
I didn't find the section to determine the penalty based on the annualized method? Thanks.
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Unfortunately, if you didn't make the estimated tax payments that were due, penalties will likely be assessed. What you can do, to mitigate the matter would be to pay the remainder on or before December 15.
Also if this is the first time in which there will be underwithholding, the IRS MAY consider abating any underpayment penalties.
Since you applied your prior year refund, the software should generate the information using that refund as a first quarter estimate. -
I did enter the income as $97,000. It still doesn't show any penalty. Do you know where to look for in the system? Thanks.
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Hi Midpoint,
You can find the option on the Misc menu to calculate any underpayment penalty reported on Form 2210.
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Unfortunately there is no Form 2210 under the Mis menu. I requested the Installment Agreement (Form 9465) and the summary shown I owned $5500. Where to find the penalty I have to pay in the FreeTaxUSA system? Thanks.
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Hi Midpoint.
Currently, the Form 2210, for the underpayment penalty, is not under the Miscellaneous menu. We are waiting for quarter 4 interest rates to be released by the IRS, and then we're have it back up and going. We'll definitely have it by the 10th of January 2025. Keep checking back, we could have it before then.
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Can't he just tell his IRA custodian to withhold the tax owed from his $30K distribution? Witholdings (unlike estimated tax payments) are considered paid equally throughout the year, so should avoid any tax penalty as long as he meets the safe harbor requirement (withholding at least 90% of the current years owed tax or 100% of the tax owed last year, 110% if your total income for last year exceeded $150K).
Like I indicated, this only works for WITHHOLDING, not for estimated tax payments. Only withholding is considered as paid evenly throughout the year even if it is really paid all at once.
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Good point. Some tax planning can go miles and save you some future problems. Reaching that 90% threshold of tax due is important.
Here are two community articles on Estimated Taxes and the Underpayment Penalty.
https://community.freetaxusa.com/kb/articles/62-what-is-the-underpayment-tax-penalty
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Thank you for advices.
I was underpaid the estimate tax payment due to my own mistake. My approx. annual estimate tax for each quarter will be $1825 each. My 2023 withhold $3,000 should cover the first quarter; and I already made payment for the fourth quarters.
What is the ballpark % of IRS penalty on $3650 for second and third quarters? I use rate 8% which will be around $300. Appreciate for your advice.
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HI Midpoint,
I see that you got the correct interest rate for the 2nd and 3rd quarter of 2024. The $300 is a close estimate of the penalty.
Here is a link to the form 2210 and instructions.
