Estimated tax options post-2010 Roth conversion
Given:
– We are 70.5+ year old actively employed professionals.
– Two 401k plans (husband/wife) are first eligible for Roth IRA conversion in 2010.
– We have sufficient non-sheltered assets to pay the Fed/state tax FULLY on 4/15/2011 at the 35% rate.
– Estimated tax payments in year 2010 would be apportioned to 110% of the taxes paid in 2010 (based on 2009 AGI)
– The Roth conversion amount is approximately four times our annual AGI for 2009.
– We are in the 33% bracket for 2009, and have been consistently so for preceding years, expecting the 35% bracket for Roth conversion year 2010.
– Our AGI for 2011 will return to 2009 AGI levels or lower.
Hypothesis:
– Applying the 90%-of-prior-year-taxes-paid standard (including 2010 earned income + 2010 Roth conversion exposure) for calculating estimated taxes
to be paid in 2011 against 2012 federal tax obligations (when AGI returns to 2009 levels) results in an egregiously high amount, exceeding the
probable tax due by 400%!!!
Query:
– Given the above, is it reasonable practice to pay an estimated tax in 2011 based on 110% of [b]2009 [/b] levels?
Permalink Submitted by Roy Sullivan on Thu, 2009-10-22 19:51
I believe I found the answer to my query in a prior post to this forum:
“[i]…Yes, you can. That’s why I mentioned that you would switch over to a target of 90% of your actual 2011 tax. There are [b]two[/b] safe harbors you can use, either 100% (110% for higher incomes) of the prior year tax or [u]90% of the current year’s tax. In 2011 when you income will drop considerably due to no conversions, you would use the 90% of 2011 to determine your estimates.[/u] Of course, this takes more work trying to guess at your current year’s income and then determining the approximate tax bill in advance than simply using the prior year’s actual taxes. Therefore, most people use the prior year even if income will drop somewhat. However, with a big income drop this results in overpaying considerably and providing the IRS will an interest free loan[/i]”
Permalink Submitted by mk foss on Fri, 2009-10-23 01:21
The 90% of 2011 tax would be the best solution in this case. Even if your off a little, the penalty isn’t as onerous as many people believe. It’s based on IRS published interst rates ~6% for 2008 computed on a quarterly basis. Borrowing from the government in this instance is very reasonable compared to credit card rates and bank loans.