Underpayment penalty (easy)


F

FredK

My AGI for 2006 will be about $90K.

My federal withholdings will be about $12,900 for 2006. In
2005, my federal tax paid was $12,500. Since in 2006 I will
have paid more than 100% of the tax shown on my 2005 return
through withholdings, doesn't that mean I won't have to pay
an underpayment penalty no matter how much tax I owe for
2006? At least, that's how I read the Instructions for Form
2210 (http://www.irs.gov/instructions/i2210/ch01.html).

I ask because I want to convert $52,000 from a traditional
IRA to a Roth IRA this year (2006). I realize I'll owe
something like $12,000-$13,000 in federal taxes on the
conversion, but I'd just like to make sure I won't owe any
underpayment penalties.

Thanks.
 
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R

rick++

Thats right. But next year your are subject to penalties.
So its recommended to get into the habit of quarterly
estimates if you have variable income from investments or
business. Tax software takes much of the pain out of
estimating.
 
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J

John H. Fisher

FredK said:
My AGI for 2006 will be about $90K.

My federal withholdings will be about $12,900 for 2006. In
2005, my federal tax paid was $12,500. Since in 2006 I will
have paid more than 100% of the tax shown on my 2005 return
through withholdings, doesn't that mean I won't have to pay
an underpayment penalty no matter how much tax I owe for
2006? At least, that's how I read the Instructions for Form
2210 (http://www.irs.gov/instructions/i2210/ch01.html).

I ask because I want to convert $52,000 from a traditional
IRA to a Roth IRA this year (2006). I realize I'll owe
something like $12,000-$13,000 in federal taxes on the
conversion, but I'd just like to make sure I won't owe any
underpayment penalties.
You're safe, as long as you meet the "safe harbor"
requirement:

If your adjusted gross income for 2005 was more than
$150,000 ($75,000 if married filing a separate return), your
withholding and estimated tax payments must be at least the
smaller of 90% of your tax liability for 2006 or 110% of the
tax shown on your 2005 return (provided your 2005 return
covered all 12 months) to avoid an estimated tax
penalty!!=:)
 
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