Reporting IRA withdrawal date for estimated taxes | Ed Slott and Company, LLC

Reporting IRA withdrawal date for estimated taxes

Most retirees pay estimated quarterly tax when tax withholding is not sufficient to cover at least 90% of the year's tax bill or 100% of last year's tax bill for AGI <$150K and the tax due after subtracting withholdings is > $1,000

Let's say I do a large Roth conversion in the first quarter of 2018 and don't have any of it withheld and sent to the IRS as a withholding. Let's say this is $30K over my otherwise even quarterly income of Social Security and a Pension. The worksheet in Pub 505 for determining the amount of the quarterly estimated payment requires including the income in the quarter received. But the 1099R, at least as far as I can see, does not have a place for the dates this, or other, distribution(s) were made, so how would the IRS know that a large amount of the household's AGI, from the large Roth conversion, was realized in the first quarter?

Other larger periodic income, such as Realized Capital Gains, do have a transactional date on the 1099B that reports the gain

The instructions for the Table 2-7 in Pub 505 quarterly estimate only require entering that part of the AGI that is for that quarter, and I don't see any exception for taxable IRA distributions.

Thanks

BruceM

  • "so how would the IRS know that a large amount of the household's AGI, from the large Roth conversion, was realized in the first quarter?"
  • You are legally responsible for filing an accurate tax return, and that includes an accurate Schedule AI (Form 2210) to report annualized income per tax quarter.  If you don't annualize on Schedule AI, your required annual payment will be treated as being 25% of the total for each of the four tax quarters and may result in underpayment penalties for each of the first three quarters if you only made an estimated tax payment for the 4th quarter.  If you file an inaccurate Schedule AI reporting the income as having occurred in the 4th quarter (to avoid a calculated underpayment for the first three quarters), the IRS could detect that should they audit your tax return and require you to provide them with the transaction details for the Roth conversion.

  • If your equal quarterly estimates total to 100% of your prior year tax liability (110% if AGI > 150k) there will be no underpayment penalty no matter how much you owe due to the conversion. With a 1st quarter large conversion you would know early on that the prior year AGI based safe harbor is all you need to do to avoid underpayment. No need to complete Sch AI. Of course, there would be a large amount due next April.
  • A large 4 Q conversion is more problematic if not planned for earlier, but even then if the prior year tax liability safe harbor is met, there is no underpayment penalty. However, if your tax liability in the year after that will drop back to normal, the prior year safe harbor would require an over payment, so you would then use 90% of the current year tax liability as safe harbor with the challenge being you will not know what that amount is earlier in the year to plan your estimates. So the year after the large tax year is when you are more likely to have to use AI. 
  • It is reported that this year is going to result in large cap gain distributions this month even though the market has no gains. That could also trigger the AI for this year if the prior year safe harbor is not be met.

Thanks. Its interesting that I did a Roth conversion last year, but when I went back through 2017 TurboTax, it did not ask me for the conversion date.....although this may be because TT recognized that our 2017 withholdings + quarterly pmts were more than 100% of the 2016 tax. 

TurboTax would not ask for the conversion date per se.  If TurboTax determines that you would be subject to an underpayment penalty with the default reporting (i.e., your entries do not indicate that you qualify for any of the safe harbors that Alan mentioned), TurboTax will offer you the opportunity to annualize your income, but leaves it up to you to allocate any particular income to the appropriate tax quarter and enter it as a total amount of income for the quarter.

 

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