Underpayment penalty

[walkingman]

When the FED started to raise rates in 2021/2022 I decided to move some of my stocks to CD's with the intention of reducing my exposure until they stopped raising rates....."Don't fight the Fed".

So now a lot of these short term CDs are maturing and I will owe quite a bit of taxes. Along with that I had to start taking RMDs last year. I have tax taken out of the RMDs....I usually try to at least get close to breaking even or not owing much several hundred or so.

So my question is - I wonder if I will get hit with an underpayment penalty? I think I will owe probably tax on around 10-15K interest. Is there an easy way to make a tax payment before the end of year to avoid the issue or just wait until tax time next year and pay - but will I get a underpayment penalty?

I do my own taxes because they are not complex - no debt, no tax deductions, no earned income, etc. A little capital gain in my taxable accounts but most investments in my IRA/Roth.

[marybourg]

1. Google "estimated taxes" and, for next

year “safe harbor”.

[walkingman]

2. Thank you - the "safe harbor" rule might be something I can use.

I need to spend some time getting more accurate estimates. I might just might try and make a tax payment this year. I figure worst case I will get a refund for the excess? Do you know of an easy way to make a one-time online tax payment? I do have a treasury direct account (for IBonds).

I wish I could just get taxes withheld at time of CDs maturing but that doesn't seem to be an option. If CD rate continue to be 5% or above I will probably leave more in them for my fixed income % in future years so what I learn from this year will be valuable in coming years.

[progree]

3. I make estimated tax and other kinds of payments using eftps.gov

I've been using them for well over a decade.

Remember state taxes too?

[walkingman]

14. Thanks for the info!!

[IbogaProject]

4. Two ways to satisfy withholding requirement

One, pay at least 90% of total owed by Jan 15th.
Two, pay at least 100% of prior years tax bill by Jan 15th. Do some research for the deadline for final proper tax payment is, probably April 15th for full payment of actual total owed. If you're taking about 2023 you should be ok getting one of those estimated amounts done By Jan 15th.

[walkingman]

15. Yes, I need to take the time to get a good estimate of my liability- thanks.

[nitpicked]

5. Link to IRS rules

https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2

Also look at Pub. 505, especially chapter 2.

If you already had some certificates mature, depending on the date, you may have already underpaid. Estimated tax is due quarterly on income received in that quarter (that hadn't had taxes withheld already).

BUT I am not a tax expert. I would recommend you talk to a CPA with tax expertise, or some other tax professional, to make sure there will be no ((further)) underpayment. And do this before year end. There are provisions to pay everything in January, if you don't fit under safe harbor rules. 

[walkingman]

16. I do have several already matured - I need to do some calc to see what I am actually dealing with. Gracias.

[progree]

6. You must meet your tax obligations on a quarterly basis

ESTIMATED TAXES - what payment covers what months:

Jan1-Mar31: due April.15,
Apr1-May31: due June15,
Jun1-Aug31: due Sept15,
Sep1-Dec31: due Jan15

So every due date is 15 days after the end of the period covered. But the periods are not all 3 months: The due June15 covers 2 months and the due Jan15 covers 4 months -- https://www.irs.gov/faqs/estimated-tax

You canNOT just wait to the end of the year (Dec 31, or Jan 15 or April 15 of the following year) and make a lump sum payment for all the year's taxes and expect to escape with no penalty.

Edited to add:

Form 2210 -- Underpayment of Estimated Tax by Individuals, Estates, and Trusts
https://www.irs.gov/pub/irs-pdf/f2210.pdf

Instructions for Form 2210 - https://www.irs.gov/pub/irs-pdf/i2210.pdf

[Yonnie3]

7. I wait and don't get a penalty

It is a special case. Because all my tax payments are via withholding, not estimated payments, the timely part doesn't apply. I calculate my tax liability in early December and then make a withdrawal from my IRA and have a sufficient amount withheld for my federal income tax.

A gotcha is you have to realize that you have a tax liability on the IRA withdrawal and allow for that as well.

[progree]

9. Yes, you met your tax obligation on a quarterly basis

I don't have any taxes automatically subject to withholding as I don't have earned income.

I calculate my tax liability in early December and then make a withdrawal from my IRA and have a sufficient amount withheld for my federal income tax.

All of my income is "unearned" - dividends, capital gains, Roth conversions, IRA RMD's ... I make my Roth conversions and IRA RMD's in December and so factor in the taxes on that in my 4th quarter estimated tax payment due January 15. And sometimes I check the withholding box too. I forget if Vanguard and Fidelity allow a higher percentage than whatever their default percentage is.

That said, I've filled out many a Form 2210 for underestimating my payments by a small amout. And/or asserting that my IRA RMD "income" and Roth conversion "income" were in December, so that I can pay taxes on those by January 15.

I've been using TurboTax for the last 5 years or so, so I forget the details. But I go through EVERYTHING on the tax return, whether prepared with TurboTax or a CPA, before filing it.

[Yonnie3]

10. I have taxable income in every quarter,

but I send nothing in until December and then via withholding. If I made any estimated payments then they need to cover the income for the quarter.

I'm obligated to pay tax on that first quarter capital gain I had but I can meet that obligation in December and no 2210 is needed.

[progree]

11. Umm

I have taxable income in every quarter, but I send nothing in until December and then via withholding.

If it's wage or salary income, then taxes are withheld from your paycheck. So you've satisfied your tax obligation on a timely basis through withholding. I've read that withholding other kinds of income, like an IRA RMD that the IRS treats it as spread equally thoughout the year even if its made in December. (Not true for estimated tax payments, unfortunately).

I'm obligated to pay tax on that first quarter capital gain I had but I can meet that obligation in December and no 2210 is needed.

If you mean you had that capital gain in the first quarter of 2023, then I'm very surprised that you don't have to pay the tax on that until December 2023. I've never heard anything like that before. (Edit - unless you've already satisfied one of the safe harbor provisions, then no problem)

Another edit - and unless you can specify an amount of withholding in December on something like an IRA RMD that covers the remaining tax obligations for the year including that capital gains tax. I don't think either Vanguard or Fidelity lets me specify any percent or $amount of withholding, other than their default value, so I wouldn't be able to do that.

[Yonnie3]

13. Vanguard allows me to withhold 0% up to 90% IIRC

I make sure that I pay roughly the full amount due for the year with that IRA withholding, so the safe harbor rules are indeed a safe harbor for me.

Long ago I was estimating quarterly payments that weren't equal because my income was varying a great deal. I prefer not to spend my time doing that and this method I use avoids the tedium of using 2210 to minimize or avoid penalties. I'd venture a guess that back then I wasn't doing a good job on the estimation of income and what the taxes were.

I have a couple of semesters in tax courses, did the training for and participated in VITA and TCE programs. It has been more than 10 years and I've quite likely forgotten important details.

[Wonder Why]

12. That is correct. If walkingman gets interest from the CD in Feb, then he has to pay an estimated tax to

avoid penalty by April 15. Similarly, for other dates of distribution. However, that only applies if the distribution is significant enough. If he gets $100, there would be no penalty but $10,000 might. The bank/whatever that pays the CD may have an option to automatically pay federal/state tax taken out of the money received before sending hem the remainder to simplify things.

For me, almost all of my income comes from SS and RMD so the amount I get from CDs, money markets, etc don't count especially since I always get a refund so the taxes taken out by SS and whenever I take part of my RMD (taken out early in the year) are overpaid so the sums from CDs and money markets during the first three quarters are below any threshold for getting a penalty.

[walkingman]

18. That is what I am a little worried about - was hoping to make a payment or overpayment by EOY.- thanks

[walkingman]

17. definately too late for that - thanks.

[Unwind Your Mind]

8. If you have a good estimate

And you want to make a payment, you can google ‘2023 1040es form’ and mail a check with it

I don’t think the quarters part matters so much in your case, as long as you pay that 90% by January 15

I’m a small business accountant so I don’t prepare returns but I do witness many 😊

[walkingman]

19. My thinking also - need to do a little more reasearch - thanks.

[walkingman]

20. Most of the CDs, not all (maybe 60-70K) are brokered CDs through Fidelity. It would be nice

if I could get Fidelity to just take out tax when they mature - but I don't think that is possible.