Tax penalty for larger Q4 IRA withdrawal - no tax withheld. What can I do to avoid penalty?

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stefib
stefib Member Newcomer
edited January 4 in General
  1. Does FreeTax offer Form 2210/ quarterly amortization calculation to reflect lumpy income so I can avoid larger penalty for a no-brainer goof such as mine?
  2. Can I make a single Dec payment ahead of doing my taxes or would that be a mistake?

Have never paid quarterly estimates and wouldn't have needed to if single Q4 IRA withdrawal had not taken place. (this also increases SS taxes which makes penalty even worse)

**Correction: Will using FreeTax create Form 2210, calculate my annualized income installment option and submit it with my Fed and State income tax filings? This would show the IRS the income was Q4 based which would extremely minimize the penalty.

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Answers

  • stefib
    stefib Member Newcomer
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    And this is called a "live event" why?????

  • KeriC
    KeriC FreeTaxUSA Agent
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    I'm so sorry for the delayed response. The turnout for our live event has been much larger than expected and we are doing our best to answer everyone. Thank you for your patience.

    If you are subject to a possible underpayment penalty, our software will offer a prompt asking if you would like to enter information for the Annualized Installment Income Method to reduce any potential underpayment penalties. The software will then ask for information to make the calculations for your Form 2210.

    Your IRA distribution will not increase your Social Security taxes, so that won't be an issue.

    Making an estimated tax payment by January 16, 2024 will also decrease the chance that you will owe underpayment penalties for 2023.

    IRS Estimated Tax Instructions and Payment Vouchers

  • stefib
    stefib Member Newcomer
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    Thank you much, KeriC and my apologies for my lack of patience. Glad the event was so successful!!

    I have done a significant amount of reading on this topic. Your response well answered my questions. Also happy to learn FreeTaxUSA can assist me with this situation. Again, thank you! :)

  • stefib
    stefib Member Newcomer
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    That said, I do think the IRA distribution did increase my taxes owed on SS. I'd like to be wrong. :o. Maybe I am?

  • KeriC
    KeriC FreeTaxUSA Agent
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    Traditional IRA contributions are often not included in your taxable income, but they won't have been excluded from your SS tax at the time, so they should not increase your SS tax when the distribution is taken.

    If you have an account in our software and have information entered regarding your IRA distribution, feel free to reach out to Support who can take a look at your account to confirm for you.

  • stefib
    stefib Member Newcomer
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    We seem to have shifted from IRA distrbutions (considered income by IRS) to IRA contributions (which lower current taxable income by postponing taxes until later withdrawn).

  • KeriC
    KeriC FreeTaxUSA Agent
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    Sorry, if it seemed like a shift. The only way IRA distributions would increase your SS tax would be if your IRA contributions had not been subject to SS tax. In all my years of experience, I have never seen such a case.

  • stefib
    stefib Member Newcomer
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    Very interesting! I'll play with my tax calculator tomorrow and try to learn what has led me to such a conclusion. :) Thank you so much!!

  • stefib
    stefib Member Newcomer
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    A phenomenon called the “tax torpedo” occurs when your provisional income (ie: traditional IRA withdrawals) bumps you into a higher Social Security tax bracket. (Not Roth's which have already been taxed). This means that every additional dollar of income can have a double impact—taxation of the additional dollar and taxation of another portion of your Social Security benefit-up to 85% of those SS benefits.