Estimated Tax Payments

[Bali Hai Again]

What is the name of your state? New York

Retired 01/03/2023. Vacation buyout (VBO) of 2 months. Put all except FICA tax into company retirement plan. Will put FICA equivalent into IRA.

Other income: SS, taxable interest, taxable retirement withdrawal. Federal and state income tax liability ZERO. After reading and doing the estimated tax payments worksheets, I believe that I am not required to make estimated tax payments for 2023.

RMD 2024:

Income: SS, taxable interest, RMD withdrawal. Projected federal and state income tax liability 12k. After reading and doing the estimated tax payment worksheets, I believe that I am not required to make estimated tax payments for 2024.

Goal: To pay the required federal and state income taxes when due and not one NY minute before they are due.

Question: Does anyone disagree and am I required to make estimated tax payments?

Thank you for your help!

 

[LdiJ]

What is the name of your state? New York

Retired 01/03/2023. Vacation buyout (VBO) of 2 months. Put all except FICA tax into company retirement plan. Will put FICA equivalent into IRA.

Other income: SS, taxable interest, taxable retirement withdrawal. Federal and state income tax liability ZERO. After reading and doing the estimated tax payments worksheets, I believe that I am not required to make estimated tax payments for 2023.

RMD 2024:

Income: SS, taxable interest, RMD withdrawal. Projected federal and state income tax liability 12k. After reading and doing the estimated tax payment worksheets, I believe that I am not required to make estimated tax payments for 2024.

Goal: To pay the required federal and state income taxes when due and not one NY minute before they are due.

Question: Does anyone disagree and am I required to make estimated tax payments?

Thank you for your help!

What happens if you don't make estimated payments is that you could be subject to a penalty for not making the estimated payments. That penalty is not huge.

Generally a taxpayer is not subject to the penalty if they owe less than 1000.00 (not the case for your 2024 projection unless you have significant withholding from your RMD). Or they have paid in via withholding 100% of the prior year tax or 90% of the current year tax, whichever is smaller.

Personally, I wouldn't be making a decision about 2024 estimates until after I have done my 2023 taxes.

 

[Bali Hai Again]

What happens if you don't make estimated payments is that you could be subject to a penalty for not making the estimated payments. That penalty is not huge.

Generally a taxpayer is not subject to the penalty if they owe less than 1000.00 (not the case for your 2024 projection unless you have significant withholding from your RMD). Or they have paid in via withholding 100% of the prior year tax or 90% of the current year tax, whichever is smaller.

Personally, I wouldn't be making a decision about 2024 estimates until after I have done my 2023 taxes.

Thank you for your reply.

I prefer not to pay any penalty. I have read what you have wrote on the IRS website. What confuses me is they don’t have an estimated tax payment worksheet for SS and RMD income. What confuses me further is they say that you can get a penalty even if you are owed a refund. I made a token estimated tax payment ($50) in May and will make two more before 12/31.

For 2024 I plan to take RMD in December of that year (let it grow for 11 months) which will trigger the income tax if that makes any difference.

 

[LdiJ]

Thank you for your reply.

I prefer not to pay any penalty. I have read what you have wrote on the IRS website. What confuses me is they don’t have an estimated tax payment worksheet for SS and RMD income. What confuses me further is they say that you can get a penalty even if you are owed a refund. I made a token estimated tax payment ($50) in May and will make two more before 12/31.

For 2024 I plan to take RMD in December of that year (let it grow for 11 months) which will trigger the income tax if that makes any difference.

The estimated tax worksheet on page 8 of the 1040-ES intructions starts with AGI which would include your RMD and any taxable portion of SS benefits. Yes it is possible to get a refund and still owe a penalty for late paying of estimated tax. For example, if your tax liability was 4000.00 for the year, you had no withholding and you didn't pay any estimated payments until the very last day to pay the 4th quarter installment, you are likely to get hit with penalties. However, if you paid that same amount over 4 quarters, you would not. Or, in the alternative if you take your RMD at the end of the year, and that is what causes you to owe tax, and properly fill out the 2210 then you should be able to avoid a penalty in that circumstance.

However, if your RMD is what is going to trigger the tax, and therefore the potential penalty, then it makes a lot more sense to simply have the appropriate amount of taxes withheld from the RMD. That way, whether you take the RMD monthly or at the end of the year the right amount of tax is going to be withheld at the right time, therefore you won't be subject to any penalties.

 

[Taxing Matters]

If you anticipate zero tax owed for 2023 then no estimated taxes are due to make this year. When the RMD payments start, I agree with LdiJ that the easiest way to ensure the tax you will owe for 2024 gets paid timely is just to have withheld from the payments you are receiving. Note that the estimated tax penalty is in reality an interest charge on the underpaid amounts. The penalty rate mirrors that of the interest the IRS charges on late payments, both of which change quarterly. For most of this century we had very low interest rates, so the estimated tax penalty wasn't much and people could make money by using their cash to invest at a rate higher than the interest until April 15 and pay the penalty when they filed their return. But now with the rising interest rates, the estimated tax penalty rates have risen too, making that strategy harder to pull off.