I figure my estimated taxes every year, which so far has always been too much. Mainly because we didn't withdraw as much as we thought.
Question: When will I be charged a penalty for not paying enough estimated taxes.
I have read everything, but I just don't understand the tax lingo. Can someone please explain in simple terms. I don't want to pay too little, but don't want to be penalized if I withdraw a litlle more than expected.
the last quarter isnt paid until the following year. As long as you pay what you owe by then...
Edit, but you must pay for each quarter than you have income.
It's rigged in that if you make a lot the first quarter and then estimate your yearly income based on that quarter you will pay way too much in estimated tax.
As long as you pay in 100% of last year's tax, you are safe from penalties except for very high income taxpayers. Look at last year's tax (line 44 on the 1040, line 28 on the 1040A) and divide it by four. Send that amount in quarterly and you will not incur a penalty even if you owe a substantial amount when you file. The general rule is that as long as you pay in 100% of last year's tax or 90% of the current year's tax, there is no penalty when you owe more than a $1,000.
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If I understand, my tax payment for 2011 was around $2000. But of course I didn't withdraw any of my money. In 2012 I will withdraw 35000 to buy a new vehicle, which will increase my taxes due. But as long as I send them at least $2000 I won't have any penalties?
I plan on sending more, because I considered what I would withdraw and will send estimated taxes, so I will be sending substantially more than $2000.
Last year I paid over $4000 in estimated taxes, and of course because we didn't withdraw we got it all back. I am trying to understand how these penalties work, because I won't be withdrawing this 35000 until Dec.
I have paid the under payment penalty a few times because I withhold less and don't make free loans of my money to the government. It's really not that big of a payment. I believe it's just an interest charge around the 8% range and it's only charged on the amount that is more than 90% of what you owe. For me I've owed an additional couple of thousand dollars to the feds and ended up paying a penalty of $10 or $20. It was never enough to cause me any concern. Now if you owe $30,000 or $40,000 it may be a good size penalty.
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Depending on any other income you have, why not just have an amount withheld from your retirement withdrawal that will cover the taxes on your withdrawal. I have worked with income taxes since 1970 and the penalty isn't too large, it's more of an inconvenience, but if you owe a bunch, it becomes more than that. The way to escape that underpayment penalty is to take last year's tax, as said above, divide by four and send the resulting amount in on April, June, September and January 15th of the following year. Unless you have very high income, I think over $150,000 taxable or something like that, and then the amount to be safe would be 110% of the prior year tax. When I withdrew money from my IRA, I just figured out how much I wanted, divided by 75% and that was the amount of the withdrawal I asked for, with the difference being withheld by the payer and remitted to the IRS on my behalf. Example, assume you want to spend $35,000. Divide by .75 and you get about $46,667. If the tax rate were 25%, the tax on the $46,667 would be $11,667 leaving you with $35,000 to buy the truck with. Now, that's not too hard, is it?
bayoubelle wrote: If I understand, my tax payment for 2011 was around $2000. But of course I didn't withdraw any of my money. In 2012 I will withdraw 35000 to buy a new vehicle, which will increase my taxes due. But as long as I send them at least $2000 I won't have any penalties?
I plan on sending more, because I considered what I would withdraw and will send estimated taxes, so I will be sending substantially more than $2000.
Last year I paid over $4000 in estimated taxes, and of course because we didn't withdraw we got it all back. I am trying to understand how these penalties work, because I won't be withdrawing this 35000 until Dec.
Yes, as long as you have made estimated, quarterly payments equaling last year's actual tax, there will be no penalties. That's not to say you will not owe a substantial tax bill, but there will be no penalties. As others have said, it is usually easier and better to have withholding taken out when you withdraw funds from a tax deferred account. When I take funds out of my personal IRA, I know that about 20% of it will be tax so I take out an additional amount to cover the taxes and have 20% withheld. In your case you say you will be withdrawing 35,000 near the end of 2012. If you think that will increase your taxes by about 20%, you would want to withdraw 43,750 and have 20% withheld, giving you othe 35,000 cash you need. One thing to remember if you are also drawing Social Security: increased taxable income could also increase the amount of your Social Security that is taxable so you need to consider that as well.
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