Avoid making negative or unhelpful posts, and instead focus on providing constructive feedback and ideas that can help to move the discussion forward.
- Manlobbi
Personal Finance Topics / Tax Strategies
No. of Recommendations: 3
I figured I blew it on taxes in my first year of retirement and I did. Had some penalties on both the state and federal.
A couple of things got me (besides being careless):
1. Tons of interest - From a lot of cash waiting to buy a house and earning closer to 5% instead of 1%.
2. RMDs on inherited accounts - I thought I had enough withheld but I guess not
3. Roth Conversion - again I thought I had enough but apparently not
4. Pension - Initially I thought taxes were being withheld on both state and fed level but only the fed was. I eventually caught it.
This year I'm assuming 5% interest on all cash/treasuries I have.
Estimating dividends.
Then paying quarterly and hopefully this will work out better.
When I get a chance I'll look through the tax forms my CPA did and see what mistakes I made.
Rich
No. of Recommendations: 2
What's really annoying (and I know I've said this before, at least at TMF) is that the IRS already knows what you owe. All those entities (banks, brokers, etc) submit the paperwork to the IRS, and the IRS runs the numbers. Probably long before you file. That's why you sometimes get letters from them that you owe them, and they almost always specify the line and the error.
So why don't they just send us a bill saying "you owe this", and be done with it? Instead of making us go through and understand arcane tax law to tell them something they already know. In over 40 years of filing taxes, I've probably spent months of my life getting documents together, entering numbers where they are supposed to be, etc. I'm getting old. I'd like those months back. But they're gone. It's really annoying.
No. of Recommendations: 5
I figured I blew it on taxes in my first year of retirement and I did. Had some penalties on both the state and federal.
A couple of things got me (besides being careless):
1. Tons of interest - From a lot of cash waiting to buy a house and earning closer to 5% instead of 1%.
2. RMDs on inherited accounts - I thought I had enough withheld but I guess not
3. Roth Conversion - again I thought I had enough but apparently not
4. Pension - Initially I thought taxes were being withheld on both state and fed level but only the fed was. I eventually caught it.
richinmd
--------------------
You can avoid exposure to the penalty problem without accurately estimating your income.
I have been doing aggressive Roth conversions for many years trying to draw down my TIRA balance before RMD's entered the picture. I calculated a conversion amount that would take my AGI up to the limit of the 24% bracket. This process necessarily involved estimating my income for the year and then calculating the proposed conversion amount to fit within the 24% limit.
If I was wrong, and my AGI exceeded the 24% limit, my only penalty was paying a marginal rate more than 24% for part of the income. The tax must be paid so the tax is not really a penalty, but I avoid any potential under payment penalty by using the 110% safe harbor rule.
For example, rather than basing my 2024 withholding and estimated payments on my estimated 2024 income. I instead base it on a known figure, my 2023 Tax Amount.
I just finished my 2023 taxes, and as part of that exercise, I compute 110% of my 2023 Tax Amount and set my 2024 estimated payments on that. So no matter what happens with my 2024 income, I am assured there won't be any under withholding penalties.
True, I may give uncle sugar a little more than I had to throughout the year, but it all settles up at tax time and the peace of mind is worth it.
No. of Recommendations: 0
What's really annoying (and I know I've said this before, at least at TMF) is that the IRS already knows what you owe. All those entities (banks, brokers, etc) submit the paperwork to the IRS, and the IRS runs the numbers. Probably long before you file. That's why you sometimes get letters from them that you owe them, and they almost always specify the line and the error. - 1pg
-----------------
If you own a rent house or two, I don't think anyone is reporting that rental income to the IRS other than you when your file Schedule E. There likely are other examples.
And income alone does not get you to taxes owed. There are several necessary things that are not reported to the IRS, such as: filing status, number of dependents, and most of all "expenses of producing income". Your idea would have to address these issues or switch to taxing income only, sort of like a national sales tax, or flat tax.
No. of Recommendations: 1
So why don't they just send us a bill saying "you owe this", and be done with it?
Because they're sometimes wrong. Many years ago, my wife and I were in-person audited. At the end of the audit, it turned out the IRS owed us a few bucks. We've been letter-audited a number of times over the years, once with the IRS claiming we owed five figures. In that case, it turned out the IRS agent had misinterpreted the stock symbols; we owed nothing. The other times, the IRS wound up owing us a couple of dollars, for which they sent us a check, and on other occasions, it turned out we owed them a couple of dollars, which they waived on their own initiative because the amount was below their threshold for caring about.
Years ago, the British tax authority floated a variation on your idea: have the employers send the top-line amounts owed each employee directly to the tax authority, they'd figure the taxes owed, take that, and send to the employee what was left. Trust the government. Fortunately, the rest of the government listened to the hue and cry and scotched the idea.
Eric Hines
No. of Recommendations: 0
I've heard the 110% mentioned before.
I've done a lot of complicated technical stuff in my life, and a lot of financial stuff but I just dread taxes which is bad when it comes to tax time.
Complicating matters is that I might return to work for up to a year for a variety of reasons but at least that would ensure I'm at the 110% of the previous year's tax payments with the auto deductions.
Maybe I should just assume a 24% tax bracket on everything and then collect whatever refund I'm owed the next year.
Thanks.
No. of Recommendations: 3
They seem to get it right more than not. And as long as there is a manual option (i.e. if I can file a return if my situation is different), then that should cover most objections. For the vast majority of USians who get the standard deduction (i.e. don't itemize), work a W2 job (or even a 1099 job), and don't have any special circumstances, just issue a bill and be done. There were some times it wouldn't have worked for me, like when I had a graduate stipend (reporting that was complicated, and I got a letter every year for four years even though I was right). We also hit AMT two or three years in a row. I used to itemize with the lower standard deduction, but since that was raised during the Trump years, I never hit the threshold to itemize.**
Intuit (Turbo Tax) would hate it, but that's their problem.
If someone wants to (or needs to) do their taxes the hard way, fine. But I think they should still send a bill with a completed 1040 for the taxpayer to review. If the numbers look right, just send a check and be done.
**To his credit, that simplified my taxes A LOT. I don't have to add up any donations or medical expenses, because we won't be anywhere near the level that would benefit from itemizing.
