In a few months, the U. S. will begin filing tax returns again, and at tax firms all over the country, people will be making the “E-Trade” Shocked Baby Face (remember him?) when they see they are being charged penalties and interest for underpaying their taxes due. Even if they made a 941 payment in the last quarter to cover ALL the tax due for the year, they can still find themselves fined by Uncle Sam as a penalty for not paying equally over the four quarters of the year. A last quarter overpayment simply means they underpaid for three quarters and overpaid for one quarter, and no, it’s not “good enough” for the IRS. People also argue that their income fluctuates or simply is not calculated because of a business structure, like a landlord who collected rent, but it’s not profit in March if he puts on a new roof in November. The reply of course is, “well it’s the rule” and you should all have a CPA level of understanding and know what to do, as the rules are available to read. Not helpful.
Here`s a fix for some folks that we have learned, not from the IRS, but from financial educator Ed Slott. Ed, in a Retirement Advisor article, says to use an IRA Required Minimum Distribution (RMD) withdrawal that includes withholding. Many seniors wait until towards the end of the year to take the money they are required to take from retirement accounts. They might be taking more and doing Roth conversions, or deciding to have it go to a charity instead of to themselves, which has its own tax benefits, but they haven’t yet signed the withdrawal forms. Ed says that if from that RMD you have all the taxes withheld that you need to cover all taxes due for the year, the IRS rules treat that withholding as paid equally throughout the year! Great trick! It’s a treat to not pay the penalties, so go see a tax planner and bring last year’s return with you. Let them review the return to see if you paid underpayment penalties, in case you’re not sure but suspect you did, and then calculate the RMD. Have the withholding from the RMD be large enough to pay all the missed quarterly payments, and avoid the penalties. Happy Halloween in advance!