I received a lump-sum distribution from a retirement account, but no taxes were withheld. How do I determine whether estimated taxes should be paid?
You should get Form 1040-ES, Estimated Tax for Individuals, to help you figure your estimated tax liability. Since this situation involves a lump-sum distribution, you may qualify for the five-year or ten-year tax option. Lump-sum distributions must meet specific requirements to qualify for optional tax treatment. The election to use either option can be made only once after 1986 by a participant born before 1936. However, beginning in 1995, a participant born after 1935, who has reached age 59 1/2 at the time the distribution is made, may be able to use the 5-year tax option. Thus, you may also need Form 4972, Tax on Lump-Sum Distributions, to make an accurate estimate of your income tax liability.
References:
I will be taking a Required Minimum Distribution (MRD) at the end of the year on my IRA. Is estimated tax due when the distribution is made or is 1/4th due with each estimated tax submission?
The tax on the distribution is not due until you actually receive the income. Thus, your last fourth quarter estimated tax payment should reflect the increase in your tax liability. You could still increase your quarterly estimated tax payments or increase your federal income tax withholding during the earlier part of the year to cover the tax liability.
If you have the proper amount withheld, you may not be required to make estimated tax payments nor have to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return (as you would if you just increased the last estimated tax payment). If you wait and make an increased estimated tax payment for the fourth quarter, you would have to file Form 2210 with your tax return because we assume you receive the income evenly throughout the year. Since you really did not, you would have to tell us that by filing Form 2210.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
If I anticipate a sizable capital gain on the sale of an investment during the year, do I need to make a quarterly estimated tax payment during the tax year?
If you first have income subject to estimated tax during a period other than the first quarter, you must make your first payment by the due date for that period. You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods.
You could still increase your quarterly estimated tax payments or increase your federal income tax withholding during the earlier part of the year to cover the tax liability. If you have the proper amount withheld you may not be required to make estimated tax payments nor have to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your tax return (as you would if you just increased the remaining estimated tax payments). If you wait and make increased estimated tax payment in the later quarters, you would have to file Form 2210 with your tax return because we assume you receive the income evenly throughout the year. Since you really did not, you would have to tell us that by filing Form 2210.
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If I sell stock at a gain, do I pay estimated taxes on the entire profit when the next quarterly payment is due or can I divide it by the number of quarterly payments left for the year and make these equal payments at each subsequent quarter?
If you first have income subject to estimated tax during a period other than the first quarter, you must make your first payment by the due date for that period. You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods.
References:
Since mutual fund distributions are typically made in the last quarter of a calendar year, is it sufficient to pay income taxes on the distributions by January 15th, or am I required to make quarterly estimated tax payments?
You do not have to make estimated tax payments until you have income on which you will owe the tax. Since your mutual fund distributions are not made until the last quarter of the year, you need only make an estimated tax payment on them in your January 15th estimated tax payment. However, even if you make an adequate payment of tax by January 15th, you may be assessed an estimated tax penalty by the IRS service center when your return is processed. This is because estimated tax payments are normally made in four equal installments and the IRS will not know your liability occurred in the fourth quarter. Therefore, you should also complete Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, and attach it to your income tax return when you file it. You should check the box on the front page of the Form 2210 to select the Annualized Income Installment method, and then complete Schedule AI on page 3. When you compute the penalty on page 2 of that form using the numbers from Schedule AI, your penalty will be $0. Even if you did not make the January 15th payment, the annualized income method on Form 2210 may significantly reduce the estimated tax penalty if the income for which there was no prepayment of tax was earned in the third or fourth quarters of the year.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
On December 20, I received a large mutual fund distribution. Due to the large distribution I'm going to owe $7,000 when I file my return. Is it okay to just pay the $7,000 when I file my return?
If the $7,000 in tax is a result of a distribution not covered by prepayments of tax, either through income tax withholding or estimated tax payments, you should make an estimated tax payment by January 15th of the next year. If you wait to pay the $7,000 with your return, you may be penalized for an underpayment of estimated taxes. Even if you make an adequate payment of tax by January 15th, you may be assessed an estimated tax penalty by the IRS service center when your return is processed. This is because estimated tax payments are normally made in four equal installments and the IRS will not know your liability occurred in the fourth quarter unless you file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts.
You may be subject to the penalty if you owe at least $1,000 in tax after subtracting your withholding from your estimated tax liability, and you did not prepay at least 90% of your current year's tax or 100% of your previous year's tax. (The latter percentage is higher for higher-income taxpayers with adjusted gross incomes from the previous year of more than $150,000.)
If you make an adequate payment by January 15th but made no earlier estimated tax payments, use Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, to compute your penalty. Check the box on the front page selecting the Annualized Income Installment method, and then complete Schedule AI on page 3. When you compute the penalty on page 2 of that form using the numbers from Schedule AI, your penalty will be $0. Even if you did not make the January 15th payment, the annualized income method on Form 2210 may significantly reduce the estimated tax penalty if the income for which there was no prepayment of tax was earned in the third or fourth quarters of the year.
For more information on estimated tax payments and the underpayment of estimated tax penalty, refer to Publication 505, Tax Withholding and Estimated Tax.
References:
- Publication 505, Tax Withholding and Estimated Tax
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts
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