paying estimated taxes?

[shalab]

Question for US based investors - particularly Eric. If you owe the govt large amounts of cash from investment gains, do you pay them in the last quarter or you pay them every quarter? Since there is a penalty if one pays less than 90% of owed taxes - I am asking you for advice. I owe taxes for IRA conversion to Roth in 2011 and 2012.

 

cheers!

Shalab

[ericd1]

Probably the wrong Eric and also not a tax attu, but as I understand it...if you make quarterly estimated tax payments (equal pmts) that are 110%+ of the previous years taxes paid you can pay the balanced owed on April 15th. Don't know what the rule is if you dont pay estimated taxes. 

[CONeal]

For my estimated qtr tax bill I pay everything that is due from the gains in that qtr.  Might be able to hold off until April 15th in some casses but if your a little off the penalties rack up pretty quick.

[SJUFootball16]

Question for US based investors - particularly Eric. If you owe the govt large amounts of cash from investment gains, do you pay them in the last quarter or you pay them every quarter? Since there is a penalty if one pays less than 90% of owed taxes - I am asking you for advice. I owe taxes for IRA conversion to Roth in 2011 and 2012.

 

cheers!

Shalab

 

Shalab,

 

As long as your payments cover 100% of your tax liability from the prior year, there will be no underpayment penalty.  You can do this even if you know the coming year's tax bill will be higher and you'll just have to make up the difference come filing time.  Realize that if your AGI was over $150,000 (married, filing jointly) the previous year, then the safe harbor is 110% of last year's tax due. 

 

If you plan on splitting the conversion income from a Roth conversion in 2010 on your 2011 and 2012 tax returns, your 2011 estimates would be based off of your 2010 tax return using the rules above.

[ERICOPOLY]

Perhaps you meant this Eric:  I don't have enough confidence to answer definitively.  I already paid the 2010 tax on Roth Conversion, but I think I will spread it over 2011 and 2012.  I haven't filed taxes yet for 2010, and I normally don't do so until around September or October.  The past few years I have fallen into a pattern of asking for an extension in April -- just because I am lazy, and it also helps my tax preparer smooth out their work load.

 

My understanding on the estimated tax rules is that, based on prior couple of years' earnings, there is a calculator that tells you how much estimated tax you owe each quarter in the current calendar year.  No matter how high your tax bill for 2010, your estimated tax payments in 2010 should only have been as large as that calculator told you.  So even if you make $1m in earnings this year you'll owe no estimated tax payments if you made nothing at all in the past few years.

 

So if you converted in 2010 but you are spreading into 2011 and 2012, then I don't think any earnings are reported in 2010 and thus it won't impact your estimated tax for the 2011 tax year.  But the amount you pay in tax in 2011 due to the conversion might bump up your estimated tax payment for 2012.

 

[ERICOPOLY]

Make sure you double check anything I said with a real tax person.  I am not trained in taxes in any way. 

 

There might be some sort of exception in how Roth conversions affect estimated taxes.

[ericd1]

I'm not familiar with multiple prior years calcs. That's a new one on me. I found this online...(About.com)..But you should check with your tax preparer about your own personal situation...

 

"You need to pay in at least enough tax through a combination of withholding and estimated payments to avoid the estimated tax penalty. To avoid the penalty, you will need to pay in "at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller," according to the IRS."

 

 

[ERICOPOLY]

I'm not familiar with multiple prior years calcs. That's a new one on me.

 

You're right, it's just the prior year (that's an option -- if you can't estimate the current year, you can just use the prior year's tax as the estimate).

[bookie71]

The estimated tax is due "quarterly" on 4/18, 6/15, 9/15, and 1/15/12.  There is an exception for when the income is earned in a particular time frame as the third quarter.  Look up form 2210 and instructions as this gives the exceptions as we;ll as how the penalty is calculated..  Withholding is treated as if earned 1/4 in each quarter.

Most use the prior tax as the estimated for the next year as it is difficult to estimate what is to come in the future.