Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
I retired and started to collect Social Security in July, 2002. My DW continued to work. When time came to prepare income taxes for 2002 I found that I had to pay a significant amount over what had been withheld from paychecks. Factors behind this were some capital gains and 85% of my SS being taxed.
So now we are half way through 2003 with DW still employed but I have no earned income. What is the best and easiest way to estimate what my tax liability will be for this year? I'm not particularly worried about having to pay additional but don't want to get into a penalty situation.
I considered using my 2002 TaxCut software using my estimated numbers for 2003 but with the tax changes, etc. I'm not sure that will get me to a reasonable liability.
Any one have any suggestions? And if it appears that I will owe significant tax in addition of DW's withholding is there a way I can make a payment now to avoid penalty?

Bob
Print the post Back To Top
No. of Recommendations: 0
There are only 2 estimators that will work with post-May 5 rates and rules, and include 20% LTCG and AMT also. They are both free for that. http://www.hrblock.com/taxes/tools/taxcal.html and
http://www.edcosoft.com/qitc.html

2002 TC or TT or TA will not work this year. The QITC program will compute your installments also but have your wife overwithhold. Do not pay an estimate now. good luck ed
Print the post Back To Top
No. of Recommendations: 0
You can also have taxes withheld from your Social Security monthly checks.

Choc
Print the post Back To Top
No. of Recommendations: 1
What is the best and easiest way to estimate what my tax liability will be for this year? I'm not particularly worried about having to pay additional but don't want to get into a penalty situation.

The "easiest" way is to use the safe harbor provision: pay in for taxes for 2003 what your total tax liability was for 2002. This will result in paying in a bit more, probably, than what you'll owe, but given the very low interest rates now that probably won't matter much.

If you haven't been paying enough in quarterly estimated tax payments (for April 15 and June 15 payments), then adjust withholding on DW's income to make up the difference. Estimated tax must be paid in equal and timely payments to avoid penalty; you can't make it up by paying more in the September and/or January payments.

Karl, Tax-Aide volunteer


Print the post Back To Top
No. of Recommendations: 0
Estimated tax must be paid in equal and timely payments to avoid penalty; you can't make it up by paying more in the September and/or January payments.

I shifted some assets around and they earned significantly (from a tax standpoint) more interest and dividends during the second quarter than the first. So I paid a higher estimated tax on June 15, and will make this same higher payment for the rest of the quarters remaining. Since this was not something I had planned in advance, I could not make the first-quarter payment reflect the change. I'm already paying more in estimated taxes than last year, while withholding remains the same. That should keep me safe from penalties, yes?

What if you have a sudden unexpected surge in income in the last quarter? You can't retroactively make equal payments--all you can do is pay the tax that quarter. Can you be penalized for this?

--fleg
Print the post Back To Top
No. of Recommendations: 1
What if you have a sudden unexpected surge in income in the last quarter? You can't retroactively make equal payments--all you can do is pay the tax that quarter. Can you be penalized for this?

The annualized income calculation method protects you from this problem. See Schedule AI of the Form 2210.

Phil Marti
VITA Volunteer
Print the post Back To Top
No. of Recommendations: 0
fleg: You don't have to worry about penalties if you paid in more this year than last year's tax UNLESS you paid less in early installments. So, unless you are going to use the Annualized Income Method paying more in later quarters is a waste of money. IF your income has a lot of stock dividends you should have been able to REDUCE your second installment. I suggest you either:
1. Go to the free H & R block tax estimater site I gave a link to in a previous comment in this thread and see if you met either the 90% of current year's tax safe harbor, or the 100% of last year's tax safe harbor (110% if your AGI was over $150K last year) in each quarter. You can carry overpayments ahead to satisfy future installments, but NOT back to cover previous shortages. Also the "within $1,000 of this year's tax" safe harbor is no good if you paid any installments. This might work for you because you can use the post-May 6 rates for all your installments with these "safe harbors".
OR, 2. Use the QITC link for a similar free full year estimater to do the same thing,
OR, 3. Use the QITC link for a Annualized Income Method calculator. This might be better for you because your income increased in later quarters. But when using this method (now to figure it, or with your return next April) you'll have to use the pre-May6 rates and rules for the first installment because the law wasn't passed when your first installment was due. If you underpaid the first installment there is nothing you can do about it now except to increase withholding which is usally averaged over all 4 quarters. You can compute the first instalment free, but must register ($18) your demonstrator to compute the 2nd, 3rd and 4th installments.
I strongly suggest you at least get a form 2210 and Schedule AI and instructions from the www.irs.gov web site and read and understand how this works. The 2100AI will be quite different this year (and won't be published until December) and maybe the IRS will overlook this quirk in the first quarter requirements, but it's too late for you to adjust now anyway and it balances out with the 2nd installment.
So, if you have paid in more than last year's tax already reduce your September installment so that with withholding you paid a total of no more than 3/4 of last year's tax. good luck ed
Print the post Back To Top
No. of Recommendations: 0
fleg: you said What if you have a sudden unexpected surge in income in the last quarter? You can't retroactively make equal payments--all you can do is pay the tax that quarter. Can you be penalized for this?

Yes, you can be penalized for this, but you may be able to avoid a penalty. If you are NOT going to use the AI Method you're right, you can't retroactively make a payment, but then you should have been paying enough to meet the "last year's tax safe harbor" so a higher installment isn't necessary in January regardless of unexpected additional income. But, if you were trying to meet the "90% of this year's tax safe harbor" with your previous installments, because you knew your taxes would be lower this year, then you have a problem because, as you say, you can't pay an installment retroactively and that unexpected surge raises you overall taxes. You can, however, use the AI Method and make a higher installment payment in January AND complete the full 2210 and Schedule AI to justify why you didn't make that larger payment earlier in the year. That January payment must be enough in total with other payments and withholding to meet either the last year's tax or 90% of the current year's tax safe harbors, but you must still use the AI Method. If the surge came between June 1 and Sept 1 your Sept 15 installment must be adjusted. Figuring out how much is a real trick.

Progressivly how the 2210 works is, on the first page of form 2210 you figure your safe harbors and if you paid 4 EQUAL nad ON TIME installments (or none), figure any penalty with a short-cut method. If you don't owe a penalty you don't have to file the form. If you paid installments unevenly, or late, move on to the Regular Method which assumes your income was even throughout the year and you show your installments and withholding to meet each quarter's SAME tax liability. The penalty is figured on underpayments in each quarter. If you have a penalty and want to possibly decrease it, you can then move on to the Annualized Income Method. The AI allows you to show the actual tax liability created each quarter and the payments you made to satisfy it on a cumulative basis. Simply put, the AI is 1/4 of the 90% safe harbor computed from annualizing income to date, or 1/4 of the last year's tax, whichever is lower. Appropriate factors are used for subsequent quarters.

By the way, the IRS will compute the Regular Method and any penalty for you, but if you expect to reduce your penalty using the AI Method it is required that you complete the full 2210 and Schedule AI (all the popular tax programs will do this with your return--if you have the quarterly data) AND compute any penalty, and pay it with your return. If you don't do this the IRS will use the Regular Method and bill you for THAT penalty.

There's another trick that might sometimes work to reduce the penalty. You can elect to have your withholding applied in the quarter withheld instead of averaging 1/4 in each quarter. This particularly works for people who are laid off from a job mid year and due to self employment must start making installment payments. You must elect this on your form 2210 and complete either the Regular or AI Method.
ed
Print the post Back To Top
No. of Recommendations: 0
Thanks for all the advice on estimated tax payments. One idea running through all this is that if you actually pay the tax you owe as the income comes in, you can get dinged for not filling out and complying with extra forms. That's government for you, I guess.

--fleg
Print the post Back To Top
No. of Recommendations: 0
Thanks for all the advice on estimated tax payments. One idea running through all this is that if you actually pay the tax you owe as the income comes in, you can get dinged for not filling out and complying with extra forms. That's government for you, I guess.

--fleg

Well, you can look at it another way. Most folks can estimate this year's income and tax within 10% (not 2003, but in years past and future), or use last years tax (which is probably an overpayment this year). If you think your "paying as you go" you are (miss)using the AI Method already which could be the best deal you ever got from the IRS. Just ignore estimating full year income and multiply your first quarter's actual income by 4 (that's Annualizing). Figure the tax on that amount and multiply by .225 (thats 90% of 1/4). Whatever deduction you can take in the first quarter are leveraged by 4 when annualized to figure the first installment (imagine a $12,000 Capital Loss Carryover instead of $3,000). You also don't have to give them 1/4 of the tax on your year-end distributions or pension withdrawals (Defer them until after September 1). Itemized deductions work the same way (property taxes?).

This gets pretty complicated what with SE taxes if you're self employed, phase in and out of taxable SS if you're retired, AMT for lots of folks, getting all your Child Tax (and other)Credit(s)
in the first quarter, etc. etc. etc. so we publish the only calculator available to compute all this (every year since 1998) at www.edcosoft.com/qitc.html A fully functional demonstrator is available free to estimate full year's tax and compute the first installment and all the safe harbors. There is a registration fee to compute the 2nd, 3rd and 4th installments. good luck ed
Print the post Back To Top
No. of Recommendations: 0
If you think your "paying as you go" you are (miss)using the AI Method already which could be the best deal you ever got from the IRS. Just ignore estimating full year income and multiply your first quarter's actual income by 4 (that's Annualizing). Figure the tax on that amount and multiply by .225 (thats 90% of 1/4). Whatever deduction you can take in the first quarter are leveraged by 4 when annualized to figure the first installment (imagine a $12,000 Capital Loss Carryover instead of $3,000). You also don't have to give them 1/4 of the tax on your year-end distributions or pension withdrawals (Defer them until after September 1). Itemized deductions work the same way (property taxes?).

Most of our income, by a longshot, comes from my wife's salary (I'm retired). This salary and our deductions are as close to constant as you can get, so it's easy to estimate that for the next year. Her withholding covers the taxes on her salary minus deductions plus a little more, so that we'd get a small refund if we had no investment income.

I simply track investment income for each quarter, annualize it, and if the tax on it is more than the withholding covers, I pay the extra taxes quarterly. Since our total investment income for 2002 was less than 10% of wife's salary I guess I'm OK on the 90% rule. This year the dividends will be taxed at 15% instead of 35%, so that gives me an even bigger margin of safety.

Perhaps this has all been much ado about nada.

--fleg
Print the post Back To Top
No. of Recommendations: 0
Perhaps this has all been much ado about nada.

--fleg
Well, fleg, I've been posting installment advice and suggestions on these boards for over 4 years and I'm not picking on you, but your questions typically illustrate people trying to do the right thing but frustrated by the threat of "Penalties" or the dreaded 2210 AI form. If you understand the logic behind all this it does make nada out of much ado.

You were worried about end of year distributions and shifting your income and what to do about underpaying your first installment. These are concerns of most people with uneven income, and I tried to show you how to do it correctly, and if you want, how to take advantage of the IRS rules for the 2210 AI.

You probably overpaid your first installment (due to the tax law changes if you'r going to use one of the "safe harbors"). If you still intend to pay uneven installments, don't. To use what you're doing (uneven installments) to eliminate penalties you'll have to file the 2210 AI. If you want to avoid penalties and not fill out the forms:

#1. Don't pay any installments unless they are EQUAL and ON TIME. For this year, deduct the amount of the first installment you paid from the amount you paid in June. Apply the excess June installment against what you will owe in September (at the same amount as April installment). Pay the same amount next January. You may consider this as "equal and on time" installments if you need the short method of figuring your panalty. IF this doesn't total 90% of known 2003 tax, or last year's tax, increase your wife's withholding for the rest of the year to meet a safe harbor along with your above installments. IF you get a big income in December, increase wife's withholding-- a whole paycheck or more if necessary.

Conversely, if the above computed installments are too much apply the excess April and June installment amounts toward September and pay the same reduced amount in January.

#2. IF you can't increase withholding in December enough (due to end of year distributions, pay an installment and file the 2210 AI. IF you kept track of income by tax quarter (pretty easy in Money or Quicken or your own spreadsheet) your TT or TC or TA software will do the AI for you.

#3. In future years, set your wife's withholding to cover 90% of your known annual income's tax liability. Use one of the two estimaters I gave links to for 2003. It's useless to use last year estimaters in 2003 or 2004 (in most cases). Then IF you know of any unusual income later in the year (you can get mutual fund distribution info early) increase wife's withholding.

I hope this helps you, and/or someone. Ed
Print the post Back To Top
No. of Recommendations: 0
For this year, deduct the amount of the first installment you paid from the amount you paid in June. Apply the excess June installment against what you will owe in September (at the same amount as April installment). Pay the same amount next January

This sounds like a good plan. That's what I'm going to do, and in the future I'll make sure I make equal estimated payments. Of course, if the first quarter is the high-income quarter for the year, it means being locked into three more equal (over)payments and then waiting for a refund. Still better than a penalty.

Thanks.

--fleg
Print the post Back To Top
No. of Recommendations: 0
This sounds like a good plan. That's what I'm going to do, and in the future I'll make sure I make equal estimated payments. Of course, if the first quarter is the high-income quarter for the year, it means being locked into three more equal (over)payments and then waiting for a refund. Still better than a penalty.


No, if the first quarter turns out to be the "high-income quarter" you reduce your payments in the next quarters (as you'll do this year). Then, if your income goes up, increase your wife's withholding. IF you can't do that, pay a higher installment and use the 2210 AI. Actully, the penalty isn't that bad. It's only 5% simple interest on the deficiency for the time it is not paid. ed
Print the post Back To Top
No. of Recommendations: 0
What about the Quicken Tax Estimator? It says that it is valid for 2003.

I looked at the hrblock calculator, but it says to add in your taxable SS retirement benefit. I was looking for the calculator to figure that out from the annual SS Benefit. The SS site says:

- If you file a federal tax return as an "individual" and your combined income* is between $25,000 and $34,000, you may have to pay income tax on 50 percent of your Social Security benefits. If your combined income is above $34,000, up to 85 percent of your Social Security benefits is subject to income tax.

Not very specific to say "you may".

Thanks for any enlightenment,
JG
Print the post Back To Top
No. of Recommendations: 0
The Quicken Tax Relief estimater says it will tell you how much you'll save, not how much your taxes are. I couldn't get the "Next" button to work beyond the first page, so I don't know what it will do. It says it has the new 2003 rates (as different from the original, pre-May 6, 2003 rates), but I can't tell. Does it ask for LTCGs prior to May 6? That's a good indication if it will really calculate. Their regular Tax Estimater gives you a blank page when you click on it. On both counts I declare Quicken useless. Same thing happened with both when I tried them a week or so ago.
I didn't notice that Block won't do SS taxability automatically. When I looked at it I was more interested in whether it computed the AMT correctly (it does as far as I tested it) and pre-post May 5 LTCG.

Edcosoft doesn't have these problems nor limitations, but instead of putting your personal info on the web (as Q and H&R require), it's a Excel97 spreadsheet on your own computer. It does the SS bit automatically and AMT--even has a second Scheudule D for figuring line 16 of form 6251, and form 8801 for AMT Credits, and does form 3800, child tax, savers credits and student loan interest deduction automatically.

None of these are complete tax programs, just pre-estimaters, and it would be impratical to have them do everything, but for starters they should use Post May 5 rates and rules, ask for pre-May 6 LTCG, compute AMT if you are normally subject to it, and H&R and Edcosoft are the only 2 that will. Ed
Print the post Back To Top