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I'm hoping to take the big plunge into "R" next year and am wondering: I've read that you have to pay estimated income tax on your last year's earnings. My retirement income from savings etc. will only be around 40% of that. Do I take a really big hit on this years earnings or pay estimated taxes on what I will actually be drawing?
Thanks, Jim
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Greetings, Jim, and welcome. You asked:

<<I'm hoping to take the big plunge into "R" next year and am wondering: I've read that you have to pay estimated income tax on your last year's earnings. My retirement income from savings etc. will only be around 40% of that. Do I take a really big hit on this years earnings or pay estimated taxes on what I will actually be drawing? >>

Well, that's an interesting water cooler myth if ever I heard one. :-) Be assured that you must pay income taxes only on what your taxable income will actually be for the year. And as to paying estimated income taxes, that really depends pretty much on what you elect to have withheld from your paycheck and any retirement plan distributions. Chances are, you won't have to pay a nickel in withholding during your last year of work, but only you know what your projected income and withholding will be, so only you can determine whether you will need to file estimated withholding taxes for that year.

Regards..Pixy
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It is my understanding you must pay the smaller of two numbers by January 15, 2001. Those numbers being 95% of the tax you will pay for your 2000 tax (presumably due April 15, 2001) or the tax you paid on your 1999 return.

While one is supposed to pay quarterly estimates, there is an exception for cases in which the income is received non uniformly during the year.
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Don't forget that Social Security benefits may be taxable when filing estimates. Also, taxes on IRA withdrawals can be added to following quarter estimate.
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You posted:

I'm hoping to take the big plunge into "R" next year and am wondering: I've read that you have to pay estimated income tax on your last year's earnings. My retirement income from savings etc., will only be around 40% of that. Do I take a really big hit on this years earnings or pay estimated taxes on what I will actually be drawing?
Thanks, Jim

If you do your taxes yourself, you'll have a problem unless your income comes in even monthly amounts. My 1999 income was split as follows: 20%, 9%, 11% and 60%. [The fourth quarter had mutual fund cap gains that are distributed in December] I've had similar splits in prior years and IRS bills you months later assuming that your income was evenly split.

The only way around it is to keep track of your income month-by-month and pay estimated taxes based on your actual income (taking withheld taxes into account). Then, at the end of the year, you need to fill out the unnecessarily complex Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts). I've been able to prove that I did NOT underpay and had the penalty removed. But it's extra work and a pain in the neck.

There is some leeway on paying estimated taxes and you have some wiggle room the first year you retire as one of the other posters has mentioned.

BTW, I'm not an accountant and I find that the Form 2210 gets easier to use each year, if that's any consolation.

--Hugh
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