Permalink Submitted by Alan Spross on Mon, 2012-09-10 18:54
Most people pay estimated tax using the safe harbor of 100% of the prior year tax, although they can also use 90% of the current year tax. The problem with using the current year figure is that not very many people know what that will be when the first estimate is due in April.
Income is considered earned equally throughout the year unless the taxpayer elects to file 2210 AI which is the annualized installment method. Under that method income is realized only when received, and that would enable the taxpayer to pay their usual quarterly estimates for the first two quarters, then figure in the additional tax due on the conversion and pay half the additional amount in each of the last two payments. But this form is very work intensive.
Since late interest rates are only 3%, the taxpayer could avoid the 2210 AI and make up the shortfall in the last two payments and there would only be interest charged for the first two quarters.
Withholding from other payments is probably not a solution with 100k of additional taxable income.
Permalink Submitted by Alan Spross on Mon, 2012-09-10 18:54
Most people pay estimated tax using the safe harbor of 100% of the prior year tax, although they can also use 90% of the current year tax. The problem with using the current year figure is that not very many people know what that will be when the first estimate is due in April.
Income is considered earned equally throughout the year unless the taxpayer elects to file 2210 AI which is the annualized installment method. Under that method income is realized only when received, and that would enable the taxpayer to pay their usual quarterly estimates for the first two quarters, then figure in the additional tax due on the conversion and pay half the additional amount in each of the last two payments. But this form is very work intensive.
Since late interest rates are only 3%, the taxpayer could avoid the 2210 AI and make up the shortfall in the last two payments and there would only be interest charged for the first two quarters.
Withholding from other payments is probably not a solution with 100k of additional taxable income.
Permalink Submitted by Rick Tenison on Mon, 2012-09-10 19:06
So if they did the conversion in July, they can make a payment in Sept and Jan? Can they avoid underpayment penalties this way?
Permalink Submitted by Alan Spross on Mon, 2012-09-10 19:42
If the taxes for the conversion are fully paid in the Sept and Jan estimates, they would only have an interest penalty for the first two quarters.
However, if they also file a 2210 AI showing when the conversion was done, there would not be any late interest due.
All this assumes the other estimates fully cover requirements for other income not counting the conversion.