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I was unemployed for all of 2012 and my only source of income was my unemployment insurance, so at the very end of December, I decided to convert all of my pre-tax holdings (one traditional IRA and two 401Ks) into my Roth IRA while I was in a lower tax bracket. Although I understand that the converted amounts will count as ordinary income for 2012, I hadn't taken into consideration the "pay-as-you-go" aspect of our tax system, and so now I have a large unpaid tax liability that from what I understand will need to be covered by January 15th in order to avoid penalties come tax time. I was wondering what kind of options I have, both in terms of possibly not paying the liability until April 15th, and in terms of how I'm supposed to pay for it if I must do it before April 15th to avoid the penalty. Also, from what I understand, the penalty is incurred based on the period when the liability is created, but I wasn't sure on the fine details of this. If I made the conversions at the very end of Dec, does my penalty accrue starting from the conversion date or does it accrue from the beginning of the period (Sept 1), and will it continue to accrue after Dec 31 until I pay it off? Also, is there a way to check how much tax I've had withheld so far from the IRS? I always opted for 10% to be withheld from my unemployment checks but I just wanted to make sure.

A little bit of extra info about my situation in case it makes a difference. For 2011, my total tax liability exceeded my withholdings by a few hundred dollars, so I wasn't penalized but I didn't completely cover my liability either. My liability last year still exceeds this year's liability, so the "pay 100% of last year's liability to be safe" option isn't exactly an option. I was also wondering what the easiest way to calculate my estimated total liability would be. My only income in 2012 was unemployment insurance, misc interest from bank accounts, and now the Roth IRA conversions, and I'll be using the standard deduction. Thanks for any help that anyone can give me regarding this matter, and if more info is needed to answer my questions, then by all means ask.
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I was unemployed for all of 2012 and my only source of income was my unemployment insurance, so at the very end of December, I decided to convert all of my pre-tax holdings (one traditional IRA and two 401Ks) into my Roth IRA while I was in a lower tax bracket.

I assume you have non-IRA cash available to pay the resulting tax liability. If you pay from your retirement funds, assuming you're under 59 1/2, or don't pay in full you'll incur penalties that will make the pittance you're worried about look like a walk in the park.

Although I understand that the converted amounts will count as ordinary income for 2012, I hadn't taken into consideration the "pay-as-you-go" aspect of our tax system, and so now I have a large unpaid tax liability that from what I understand will need to be covered by January 15th in order to avoid penalties come tax time. I was wondering what kind of options I have, both in terms of possibly not paying the liability until April 15th, and in terms of how I'm supposed to pay for it if I must do it before April 15th to avoid the penalty.

To pay before you file your return use Form 1040-ES. Form 2210 shows you how to calculate the penalty. Since most of your income came late in the year you would probably pay a lower penalty by using the annualized income method explained in Pub 505. Note that if you paid nothing at all in advance, including no withholding, the penalty would be 2% of your tax.

Also, from what I understand, the penalty is incurred based on the period when the liability is created, but I wasn't sure on the fine details of this. If I made the conversions at the very end of Dec, does my penalty accrue starting from the conversion date or does it accrue from the beginning of the period (Sept 1), and will it continue to accrue after Dec 31 until I pay it off?

The estimated tax penalty is calculated from the due date of the ES payment until the date paid or April 15, whichever is later. See Pub 505.

Also, is there a way to check how much tax I've had withheld so far from the IRS? I always opted for 10% to be withheld from my unemployment checks but I just wanted to make sure.

This is why I always tell people to keep things like check stubs, which I assume you didn't. The IRS can't tell you because they don't know yet. Maybe the agency that paid you can.

I was also wondering what the easiest way to calculate my estimated total liability would be.

I would think that all the software providers have demo copies of their 2012 software available for free preview. I know www.taxact.com does

Phil
Rule Your Retirement Home Fool
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http://www.irs.gov/taxtopics/tc306.html

You will need to file form 2210 to handle uneven income and withholding.

For income in the 4th quarter, federal penalty starts from Jan 15th. If your state has income tax, then you need to check your state's requirements.

This may give you an estimate:
http://www.efile.com/tax-service/tax-calculator/
Given the last minute changes in the tax laws, I am not certain that any calculator is correct.

The most likely 2012 federal safe habor would be $1,000 less than your tax liability for 2012.

The penalty is essentially daily interest until paid. I don't know the exact interest rates for 2012. They haven't been extremely high. I believe for an individual in the range of 3%.

Delaying federal payment until April would like cost you between 1 and 2% of the underwithheld amount.
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TMFPMarti: I do have non-IRA cash to pay the resulting tax liability so I'm covered in that respect. In regards to 1040-ES, do I need to complete that if I plan to use EFTPS (which I've never used before so I have no idea how it works)? I signed up for EFTPS two days ago and I'm supposed to receive my PIN in a week. Am I correct in assuming that I can simply make some type of lump sum payment in my name without specifying exactly what it's for?

vkg: Thanks for reminding me about the state requirements. It hadn't even occurred to me that I would need to make an estimated payment for that as well, and I do need to pay that by Jan 15th as well (and I signed up to pay it online).

Thanks to both of you for your responses. They were extremely helpful.
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In regards to 1040-ES, do I need to complete that if I plan to use EFTPS (which I've never used before so I have no idea how it works)? I signed up for EFTPS two days ago and I'm supposed to receive my PIN in a week. Am I correct in assuming that I can simply make some type of lump sum payment in my name without specifying exactly what it's for?

If you make the payment through EFTPS you don't need to mail a 1040-ES. EFTPS doesn't have the best user interface I've seen, but you should be able to figure it out once you have your PIN. Just remember that you're making an estimated tax payment for 2012.

Phil
Rule Your Retirement Home Fool
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If you make the payment through EFTPS you don't need to mail a 1040-ES. EFTPS doesn't have the best user interface I've seen, but you should be able to figure it out once you have your PIN. Just remember that you're making an estimated tax payment for 2012.


Phil's last statement can't be emphasized enough. If you mistkenly enter the payment as a 2013 estimated payment, there is no way to move it back to 2012. It's against IRS rules.

Ira
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The penalty is essentially daily interest until paid. I don't know the exact interest rates for 2012. They haven't been extremely high. I believe for an individual in the range of 3%.

Delaying federal payment until April would like cost you between 1 and 2% of the underwithheld amount.



fwiw : TurboTax says my penalty is about $70 on $3500 tax
.... I figure it's not worth the trouble to deal with ES at
this point
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What is "ES"?
I think "E" stands for "estimated" but what is the "S" for?

AM
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What is "ES"?
I think "E" stands for "estimated" but what is the "S" for?

AM


The form is 1040-ES. Since there is a 2040 schedule E, the first two characters are used to identify the estimated tax form.
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2040 schedule E

1040 schedule E

(My typing is really bad today.)
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fwiw : TurboTax says my penalty is about $70 on $3500 tax
.... I figure it's not worth the trouble to deal with ES at
this point

==============================
It's not much trouble. You just go to the IRS website, download/print the Form 1040-ES, fill it in, and send it in with a check.

The form is just a coupon/voucher where you fill in your name, address and SS No., and amount you're paying.

It's a lot less trouble than getting set up with EFTPS.

Bill
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Hi all, I had one last question regarding EFTPS. Since my payment is due on Jan 15, can I wait until Jan 15 to initiate the payment on EFTPS? Or do I need to give it some kind of lead time? Thanks.
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Since my payment is due on Jan 15, can I wait until Jan 15 to initiate the payment on EFTPS? Or do I need to give it some kind of lead time?

I'm pretty sure you have to give it some lead time, but I don't think you realize that when you authorize the payment in EFTPS you also specify the date for that payment. No need to time your EFTPS input.

Phil
Rule Your Retirement Home Fool
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I'm pretty sure they need at least 2 days. But as Phil said, you can just tell them when to make the payment.

Some people schedule a whole year of estimated tax payments at one time, with each being paid on the due date and not a day before.

--Peter
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Great, thanks again for your help.
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