Underpay Your 2017 Tax?

Bozo | Dec 25, 2017 | 1,375 posts since 2011

Check out IRS Form 2210.

With the advent of the "gig" economy, more folks are unknowingly underpaying Uncle Sam. Uncle Sam is not amused, and tends to charge interest for underpayments (roughly 2.6%+ as of 2016). If you are confused by Form 2210, don't be alarmed. The only thing more confusing than the form is/are the instructions. For your laugh of the day, type "IRS Form 2210 Instructions" into a search engine.

For those with RMDs, one saving grace is that any withholding on any withdrawal (even at year's end) is spread out over the entire year. For wage earners, the same concept applies. Any withholding before EOY is deemed spread over the entire year. For investors, same concept.

If totally flummoxed, the ultimate insult: the IRS will calculate your under-payment penalty and send you a bill. No need to fill out IRS Form 2210, which was incomprehensible to begin with.

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me1004 | Dec 26, 2017 | 1,381 posts since 2010

I use 2210 every year. If you have your income in unequal amounts over the year, and make more later in the year than earlier, you are better off paying estimated taxes on the basis of your income-to-date and using 2210 when you file your taxes in April. But you need to calculate all your actual income-to-date each quarter -- which can be a hefty chore, a lot of numbers. And you need to do that over the course of the year, not at the end, or you won't know how much to pay each quarter.

I have actually had the instructions the IRS puts out for the form rewritten in a couple of spots over the years, pointing out to the IRS how incomprehensible or confusing they were with the vague or misleading language used, but more importantly, how the calculations they have you do produce the wrong results, and then you get hit with a penalty that is not your fault! The following year, the instructions have been changed to what I challenged, and they have even changed how the calculations are done to conform to what I challenged.

I haven't found the instructions too difficult -- except for those couple spots -- but you do need to read them closely and get used to the terms used. And its a good idea to pay a little more than you calculate, just to provide a little buffer for the inevitable variations when the tax tables for the year come out.

IRS puts out a publication, I think its Pub. 505, that has all the instructions in it -- AND a worksheet to use to calculate your tax each quarter.

2210 is necessary to avoid the IRS calculating a penalty for you. 2210 can show that you paid all owed each quarter according to how much you made year-to-date -- something the IRS cannot determine without 2210, so simply calculates a penalty on the basis that you did not pay in equal quarterly installments. If your income each quarter is unequal, do not let the IRS calculate your penalty, you will pay a penalty when you did not owe one, or will pay a larger one. However, you need to start that process right at the first quarter of each year, you have to calculate it each quarter, or you are not likely to pay enough each quarter. 2210 is not for unplanned lower payments in a quarter.

Ricochet | Dec 26, 2017 | 522 posts since 2010

I don't have the problem of a complicated tax return.
But doesn't this rule eliminate problems of underestimated quarterly tax payments for wage and interest only folks in 2017 ?

General Rule
In general, you may owe a penalty for 2016 if
the total of your withholding and timely estima-
ted tax payments did not equal at least the
smaller of:
1.
90% of your 2016 tax, or
2.
100% of your 2015 tax. (Your 2015 tax re-
turn must cover a 12-month period.)

me1004 | Dec 26, 2017 | 1,381 posts since 2010

Richchet, yes, that is so -- but that is not the best approach for everyone, it depends on how and when their income comes in. I can pay a lot less in quarterly estimated tax if I pay-as-I-go according to how much I make in that quarter. In my case, it will all be made up with the last payment in January. So, all through the year, I have the money that under that rule would have been handed over to the IRS but I am still earning income on it in the bank.

My circumstances are that the bulk of my income comes all at the tail end of the year, not fairly evenly throughout the year. Its kind of like what some banks do with CDs, they pay the interest only at maturity -- and all that income comes at that time. Or like retail businesses, which I've read make the majority of their income for the entire year all in the November-December holiday season, which is why that season so so important in the business news columns. Or mutual funds, which typically pay out their required annual distributions only once a year at the end of the year. Or, someone who lost their job late last year, and in the first quarter this year can pay on the basis of a big income the year before or no income in the first quarter or two or three.

This is just another of those things that it depends on one's circumstances. But most people can just make sure they follow the rule you posted.

Ricochet | Dec 26, 2017 | 522 posts since 2010

To add....even if you make up underpayments in the last quarter?

CTM | Dec 26, 2017 | 179 posts since 2010

Ricochet -

I don't know why anyone thinks this is complicated. You are totally correct, the 90%/100%/110% rule removes the need for "by quarter" calculations.

One addition, if you make more than $150K married / $ 75K single, the 100% goes to 110%.
(There are other oddities, like 66.67% for farmers & fishermen, but ...)

You don't have to pay any balance due until the April filing deadline.

Ally6770 | Dec 26, 2017 | 4,307 posts since 2010

My husband and I have always taken our RMD at the end of Dec and had 20% taken out. Never had a problem. We had a larger income when he was alive and before we paid cash for this house.

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