When do I need to pay tax on a partial Roth conversion
In late December I made the first partial Roth conversion of my traditional IRA. I intend to continue partial conversions over the ensuing years. This year's conversion will result in an under-payment of about $6,500.
My question is due I need to make an estimated tax payment by the Jan. 15 deadline? Or can I make this payment, without penalty, when I file my actual tax return, usually in March?
In prior years, my withholdings were more than sufficient to satisfy my tax liability. Last year I received a refund of about $1,250. Does this qualify as an exception to the under-payment penalty which would normally be imposed?
Thanks in advance for the help.
Kevin
Best Answer
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Yes, you are correct that the comparison is between your 2024 tax paid vs. your tax liability in 2023. So, if you paid in 2024 at least the amount of your 2023 tax liability (about $13,000), you should generally be exempt from the underpayment penalty, assuming your 2023 AGI is under the $150,000 threshold mentioned earlier.
That being said, if you expect to owe more than 1,000 dollars, it is recommended to make some estimated payments.
Answers
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Hello,
To avoid the estimated tax penalty, one of the following scenarios needs to apply to you:
- Your filed tax return shows you owing less than 1,000 dollars, or
- Your either paid 90% of the total tax for the current year, or you paid 100% of the total tax from the prior year (whichever amount is less). If your adjusted gross income (AGI) was more than 150,000 dollars (or 75,000 dollars if you are married filing separately) you would need to change 100% of the prior year total tax to 110% of the prior year tax.
The $6,500 dollar tax due means you do not qualify for the first exception to the penalty. However, it may still be possible that you will have paid 90% of the total tax for 2024 or 110% (assuming your AGI exceeds 150k) of the total tax from the prior year.
Generally if you expect to owe more than 1,000 dollars, it would recommended to make some estimated payments.
Let us know if there are additional questions or concerns.
Thanks for using the FreeTaxUSA community
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Hi kevinb, it's good that you are looking ahead and preparing for the taxes that will be due on the conversion of your traditional IRA funds to a Roth IRA.
There's a great article available in the Community that you can reference for more information about the Underpayment Tax Penalty.
Ideally, you would pay as much of the tax on the conversion as possible through withholding or making an estimated tax payment in order to reduce any potential underpayment of estimated tax penalty. As you mentioned, January 15 of the following year is the due date for the last payment period.
However, the IRS says you don't have to make estimated tax payments and may avoid the underpayment penalty if you paid at least 90% of the tax shown on the return for the taxable year OR 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for the year was more than $150,000, substitute 110% for 100%.
You ultimately have to pay all tax owed by the April filing deadline to avoid higher penalties for failure to pay.
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Phillip and Henry,
Thanks for your answers to my question. It appears I qualify for the second exception, but just to confirm, here's a little more detail.
My AGI for tax year 2023 was just uner the $150,000 limit. My tax liability was just under $13,000, and I received a refund of $1,250. Based on your explanations that should qualify me for the second exception, correct?
So I apparently
I have the option of making an estimated payment next week or paying when I do my taxes in March. This being the first time through on a Roth conversion, I wanted to make sure I didn't make any mistakes.
Thanks for the help,
Kevin
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it just dawned on me that you were referring to taxes paid so far for tax year 2024 ($14,630) versus taxes owed in tax year 2023 (just undr $13,000).
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In my story, I have paid all my tax in full for the year 2023 in 2024. And in Nov. in 2024 I have made my first conversion of $150,000 to 401K Roth and plan to pay the balance of tax when I file a tax for 2024 in April. I hope my plan should work without penalty. Please advise.
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Hi Peter,
Thanks for writing in and joining our Community.
It sounds like you converted funds from a 401(k) to a Roth 401(k)? Is that correct?
Whenever you convert pre-tax dollars to after-tax dollars from a 401(k) or IRA, you'll owe tax on the amount converted. Make sure you set aside sufficient funds or have made estimated tax payments to cover the tax due.
You have until January 15, 2025 to make the final estimated tax payment.
Since all the facts and circumstances of your tax return matter, including filing status, other income, etc., there's no way to know if a penalty will apply. In general however, there are 3 requirements the IRS has for paying estimated taxes to avoid any underpayments penalties. This is the smaller of:
- You owe less than $1,000 in tax after subtracting withholdings and credits, or
- You paid at least 90% of the tax for the current year, or
- You paid 100% of the tax shown on the return for the prior year (special rule applies to higher income taxpayers).
You can read this article in full here my colleague mentioned above.
