Avoid penalties on failure to pay proper estimatd tax

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  • #8120
    b1_lee
    Participant

    I am a retiree with little withholding from a small pension (monthly) & non-qualified distribution (quarterly). I did
    a total low 6 figure Roth IRA mostly in 2019 Q4 & therefore did little Q1, medium Q2-Q3, but big Q4 estimate tax. I received < 1K tax refund & I should have met IRS safe harbor rule by withholding > 90% of current year tax liability. It should be irreverent whether I met previous year 110% of actual tax liability because I met 1 of 2 safe harbor rule. Why did IRS ding me?

    I called IRS & agent agreed with me & almost ready to correct the situation over the phone, but after a long hold they want me to file Form 2210 to prove my case. I will have similar situation in next several years & want to avoid the pains to file Form 2210 (either with tax returns or after ding again).

    Could it be:-

    -When file future returns, should I include a note (or write some where on return) explain my situation to avoid including Form 2210? Or this could make matter worse & open invite them wanting Form 2210 later?

    -I have been filing paper returns all these years, would it help if I start using Fillable forms? Your experience with fillable forms could empower me to join the e-crowd.

    -Should I total up my annual Roth conversion liability & divide evenly for all 4 Qs? I want to avoid this as I do most of my Roth conversion in Q4 & always do stock-in-kind because stocks tend to be lower during Q4. Also, want to keep max IRA to Roth IRA by paying tax with non-IRA sources.

    -Could IRS dislike estimate tax & favor withholding tax? Should I jack up my monthly pension & quarterly non-qualify
    distribution to 95% & keeping my state 5% & thus receiving zero payout from these sources? Would they allow such high % withholding? But these actions still resulting much more estimate tax than estimate tax withholding.

    -Can I ask my brokerages/banks to withhold large tax & fund it from my non-IRA accounts without a taxable event for sake of withholding tax? Would they even entertain or laugh at me with this idea?

    -Is it true doing a large withholding in Q4 & IRS will spread it evenly for all 4 Qs even money was made in Q4? If it is true, how can I do this?

    Appreciate your experience & advice!

    #8121
    kaneohe
    Participant

    “I am a retiree with little withholding from a small pension (monthly) & non-qualified distribution (quarterly). I did
    a total low 6 figure Roth IRA mostly in 2019 Q4 & therefore did little Q1, medium Q2-Q3, but big Q4 estimate tax. I received < 1K tax refund & I should have met IRS safe harbor rule by withholding > 90% of current year tax liability. It should be irreverent whether I met previous year 110% of actual tax.”

    Your situation is not clear because your words are confusing. First you said you had a big Q4 est. tax. In the same paragraph you say you withheld >90% of current yr tax . There is a big difference between est. tax and withholding……….I am guessing you did not withhold but paid a large Q4 est. tax which is a good red flag to get IRS attention.
    You should fill out Sch AI of F2210 to prove you are ok (or at least to reduce the penalty).

    If you have pensions/SS you can arrange to have withholding. Or you can pay your estimated taxes in 4 equal amounts . Both require some planning.

    #8122
    kaneohe
    Participant

    IRS assumes that income is received evenly during the yr and wants to see your estimated payments to be the same. If they are not, IRS wants you to prove late payments were because income came late in the yr.

    For some reason, IRS treats withholding as more special than estimated payments and assumes they were received evenly during the yr which matches their assumption about the timing on income.

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