Do we need to pay taxes in advance this year?

January 31, 2023 8:19 PM

We didn't make quarterly payments?

My husband retired, and we had to take the "required yearly distribution" from his retirement account. We are academics and have always lived very simply, so the retirement amount reflects this--lots piled up. In the future, we will request that our account administrators deduct the tax payments at the time of withdrawal.

But for this year, we need to make a very substantial payment to the IRS. Some of my husband's colleagues have told him that we probably should make a payment right now of at least half of the amount (which we have yet to determine as various stock account statements come in) to avoid any trouble with the IRS---since we didn't make quarterly payments this past year. Our question is: How do I go about doing this? Should I just use our Social Security numbers, names, and IRS address from last year's Turbo Tax forms and mail them a check?

Is it really necessary to make an advance payment?

Many thanks, hive-minders. We appreciate any and all suggestions!

posted by ragtimepiano to Work & Money (9 answers total)

You missed the deadline for the last estimated tax payment for 2022 which was January 31. At this point you should have all of your tax documents in hand in the next two weeks so I would just go ahead and file your 1040 as soon as possible.

"Trouble" just means that you will probably owe a penalty for failure to file estimated taxes. If you owe, the IRS will send you a letter letting you know and telling you how much the penalty is. It is usually not that bad. It is calculated based on the actual number of days that you are late (a good reason to file sooner) but maxes out at 4-6% of the underpayment. (Not your total taxes, just the underpayment and pro-rated for the number of days late based on when the estimated taxes were due. That's why another two weeks isn't going to make a big difference.

However, good news - the penalty will be waived if "In 2021 or 2022, you retired after reaching age 62 or became disabled, and your underpayment was due to reasonable cause (and not willful neglect)" To get the waiver, you would file from 2210. You find details here.

ps. if you ever send a check make sure you include the right form with it. For estimated taxes it is 1040-ES. Or, if you are willing to do on-line banking, you can authorize a one-time payment directly from your bank account at the IRS website. Less likely for the payment to get lost or misfiled if you are comfortable with risk of banking over the internet. Please don't just mail a check!
posted by metahawk at 8:51 PM on January 31, 2023 [7 favorites]

For the strict question of how to pay estimated taxes, see this IRS webpage; the short answer is, you either fill out Form 1040-ES and mail it to them along with your check, or you can make a payment online through various channels. I've usually done Direct Pay from my bank account from this Payments landing page; I've never used the "Electronic Federal Tax Payment System (EFTPS)" they suddenly seem to be recommending as the best method, nor even actually seen that phrase/acronym before. If you do an online payment, you specify it as being toward estimated taxes for the tax year in question (I think this time around for you that would be 2022), they email you a receipt, and that's it.

For the question of whether it's really necessary to make estimated tax payments: no, strictly speaking. The worst that can happen is that if you do end up owing the feds too much money in taxes for the year, on the bottom line after they account for all your withholdings/credits/deductions/whatnot, they charge you some percentage of that as kind of a late fee. The relevant official wording from that first IRS link is "Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid 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." And then there are a few additional caveats that can further adjust that, including some related to retirement. So it really depends on your particular situation's details, but there may either be no extra penalty at all this first year, or the very worst case is that you just end up paying a bit more than expected when you complete your taxes. (I had to pay a penalty like that once, because my situation changed unexpectedly mid year; it wasn't horrific, I don't have it in front of me but it was only a low single digit percentage of what I had to pay anyway. On preview, I agree with metahawk!)

Again on preview, I believe metahawk is correct that since we're past the last quarterly payment due date for tax year 2022, it won't help you much to send off any estimated tax payment now, and your best bet is probably just to file your regular tax return as soon as you have all the needed documents in hand.

Since you said you use TurboTax, as long as it's any version fancier than the baseline free version I think, it will automatically calculate any penalty/late fee you might owe due to not having paid estimated taxes quarterly over this past year. (Again, the answer might be you don't owe any penalty this first year at all, and TurboTax can figure that out too and generate any necessary forms related to that.) It will additionally spit out recommendations for quarterly estimated tax payments for you to make over this next year, so you'll be set up going forward. It'll pre-fill four copies of Form 1040-ES for you with amounts of money and due dates, and you can mail those off with checks, or just set up online payments for those amounts at the necessary times.
posted by sigmagalator at 9:02 PM on January 31, 2023 [1 favorite]

I can confirm that TurboTax will calculate the interest and late penalties for you and it will all get included in your net tax due/refund owed. As a bonus, the IRS will also eventually catch up with their calculations and just send you a bill if there’s any discrepancy. So don’t panic when you see an unexpected envelope from the IRS. Source: me, a 1099 contractor who can never remember to pay estimated taxes. Of course, yes, I do still panic inside every time I see mail from the IRS, but then I just login to EFTPS to make the payment (or you can send a check).
posted by ellenaim at 1:17 AM on February 1, 2023

Others have given better answers, but my understanding is that if one or both of you are still working and you had approximately as much withheld this year as your tax liability last year (I believe it's 100% or 110% of the previous year's tax, depending on your income), you're exempt from the estimated tax penalty, even if it turns out you should have paid estimated taxes. You want to get estimated taxes squared away for 2023, but "crap, I should have paid estimated tax" is often without penalty the first time.
posted by hoyland at 4:56 AM on February 1, 2023 [1 favorite]

The term you want to search and learn about is "safe harbor". It describes the rules for when you must pay ahead, and what the penalty is if you don't. Briefly, it depends on your last year's return. Which means that next year's taxes, in turn, will depend on what you do now.

As for the mechanics of paying, the easiest way is through the IRS website.
posted by Dashy at 5:17 AM on February 1, 2023

This is very common for people who retire to owe big for that tax year and get a warning about possibly having to pay a penalty. However, like everyone said it is easy to get a waiver because you paid 90 percent of what you did in the previous year. At my volunteer program, we always put in a note on the return that this is the first year of retirement and withholding is still being adjusted. Like you said, just make sure any income has to proper withholding from now on.
posted by soelo at 7:26 AM on February 1, 2023

My cantankerous mother, sound of mind but opinionated and stubborn, absolutely refuses to either adjust withholding on her retirement accounts for the minimum distributions or go to the trouble of making quarterly payments. "They can take my money once a year! I'm not writing checks every three months for them! I didn't ask for this money to be sent to me! All of this is their problem, not mine!"

Because her savings and income are modest and the underpayment is not very substantial, the penalty generally ends up being something like $60, which she will pay for the privilege of not having to make changes. "You know, Mom, you could save $60 on your taxes if you just..." goes nowhere.

So, depending on your tax situation and income, you may not have much to worry about. Since we're in February, just file ASAP, and your tax software or accountant should recommend something moving forward.
posted by I EAT TAPAS at 7:58 AM on February 1, 2023

Just to tag on to what sigmagalator said, I've been using EFTPS to pay my quarterly estimated taxes and annual taxes for four or five years, and it's as easy as can be.

However, you should know that unlike signing up for most online accounts, this isn't immediate. You sign up online, and then the government sends you a piece of paper with a PIN they assign you. It takes about 10 days to receive it. Once you get that PIN in the US mail, then you can go back into the system to create an online account with a super-secure password.

When you pay your taxes, you just select from the dropdowns, first 1040, and then 1040-ES (for estimated payments), and state what payment you want to make and for what tax period (like "2022" if you were paying in early January 2023 for your final estimated quarterly payment for last year). You can make one payment, or schedule up to four or five for future dates.

Also, FYI, quarterly estimated payments are timed weirdly. They're due on the 15th of April, June (yes, not July), September, and the following January (yes, not December).
posted by The Wrong Kind of Cheese at 9:27 AM on February 1, 2023

At this point you should have all of your tax documents in hand in the next two weeks so I would just go ahead and file your 1040 as soon as possible.

Faculty who have been saving above and beyond 403b limits and maybe opened a taxable brokerage account will need a 1099-B, which are not due until Feb 15. But you can definitely get started and get a feel for where you might end up.

One slightly interesting wrinkle: you can make 1040-ES payments via credit card, with a fee of a bit less than 2 percent. Which means... you can actually turn a small profit making estimated tax payments with any of the several cards that offer 2 percent cash back (or a few that go higher). If you obsess about your credit score though, I will note that its pretty easy to see the months I make payments, because there's an obvious 10 point dip until the balance is paid off. This is a pretty easy thing to admin, I have a Trello card with a link to the IRS landing page for payments, and a checklist of due dates & payments.

You can also do this if you owe taxes after filing, instead of letting Turbotax handle it for you.
posted by pwnguin at 2:41 PM on February 5, 2023