# 4th quarter income and estimated tax penalties

S

#### Stan K

Suppose my taxable income is bumped substantially by an event in the
4th quarter (e.g., I take a capital gain, I convert some Regular IRA
assets to Roth in some year other than 2010), the impact of which
could be to double (or greater) the amount of income tax due for the
year.

While my 4th quarter estimated tax payment will be based on this
additional income, can there be a penalty for underpayment of
estimated tax for quarters 1, 2, and 3? On the one hand, I can't be
expected to pay estimated tax on income that I had no way of
reasonably anticipating, but on the other, I don't see on any tax form
any provision for showing when, during the year, I received the income.

S

#### scott s.

Suppose my taxable income is bumped substantially by an event in the
4th quarter (e.g., I take a capital gain, I convert some Regular IRA
assets to Roth in some year other than 2010), the impact of which
could be to double (or greater) the amount of income tax due for the
year.

While my 4th quarter estimated tax payment will be based on this
additional income, can there be a penalty for underpayment of
estimated tax for quarters 1, 2, and 3? On the one hand, I can't be
expected to pay estimated tax on income that I had no way of
reasonably anticipating, but on the other, I don't see on any tax form
any provision for showing when, during the year, I received the income.
That's why there's different "safe harbor" options on how to compute and
pay your required estimated payments. The option you are looking for is
the Annualized Income method found on the form 2210 schedule AI. But
there may be other options that might provide advantge to you.

scott s.
...

R

#### removeps-groups

Suppose my taxable income is bumped substantially by an event in the
4th quarter (e.g., I take a capital gain, I convert some Regular IRA
assets to Roth in some year other than 2010), the impact of which
could be to double (or greater) the amount of income tax due for the
year.

While my 4th quarter estimated tax payment will be based on this
additional income, can there be a penalty for underpayment of
estimated tax for quarters 1, 2, and 3?  On the one hand, I can't be
expected to pay estimated tax on income that I had no way of
reasonably anticipating, but on the other, I don't see on any tax form
any provision for showing when, during the year, I received the income.
The reason it's called estimated tax is because you will estimate your
tax. Suppose you expect to make 14k in W2 income and 1k in qualified
dividends every quarter, and additionally 100k conversion income in
the last quarter. You could just calculate your tax, using W2 income
as 14k*4, qualified dividends as 4k, conversion income as 100k. You
can calculate your state tax first. For example, for CA multiply the
tax by 27% to get the Q1 payment. The state tax you estimate to pay
will become an itemized deduction for federal, but if you make the
last payment on 1/15 of the following year, then that payment will not
be allowed as an itemized deduction for this year.

Or you can use the exact method. This method is tedious because you
have to track your interest, dividends, qualified dividends, stock
sales, etc each quarter.

The Q1 tax is based on income earned in that quarter. Suppose you
make 14k in W2 income and 1k in qualified dividends for Q1. When Q1
is finished (March 30), annualize your income by multiplying by 4 to
get 60k, of which 4k is qualified dividends. Annualize your itemized
deductions too. Calculate the tax, choosing the standard or itemized
result by 22.5% to get the minimum estimated payment. The ratios are
different for different states, like for Q1 in CA you multiply by
27%. Only for the Q4 return, you have additional income of 100k.

Anyway, you wouldn't make an equal amount every quarter because the
first quarter is 3 months, the second is 2 months, etc.

K

#### Katie

Suppose my taxable income is bumped substantially by an event in the
4th quarter (e.g., I take a capital gain, I convert some Regular IRA
assets to Roth in some year other than 2010), the impact of which
could be to double (or greater) the amount of income tax due for the
year.

While my 4th quarter estimated tax payment will be based on this
additional income, can there be a penalty for underpayment of
estimated tax for quarters 1, 2, and 3?  On the one hand, I can't be
expected to pay estimated tax on income that I had no way of
reasonably anticipating, but on the other, I don't see on any tax form
any provision for showing when, during the year, I received the income.

Stan, if you have made timely quarterly estimated tax payments each of
which equaled at least 1/4 of your prior year tax liability, you will
have no penalty for underpayment of estimated taxes even if your
current year tax liability is substantially greater than the prior
year. Of course, you will have to pay the difference by April 15 of
the following year to avoid a late payment penalty.

If your AGI in the prior year was more than \$150,000, you must pay at
least 110% of your prior year tax liability (rather than 100%) in
quarterly installments to avoid penalty for underpayment of estimated
taxes.

If you do not meet the "prior year tax" exception to the penalty,
perhaps because your prior year tax was much greater than you expected
your current year tax to be, you may be able to avoid or minimize the
penalty by using an annualized method to calculate it. This is
especially effective when the unplanned income arrives late in the
year. Schedule AI and Part IV of Form 2210 is used to calculate the
penalty using the annualized income method. You can access the form
and instructions at www.irs.gov and calculate your possible penalty by
running the numbers through the form.

Katie in San Diego