Paying Estimated Taxes on Roth Conversion late in the game

Submitted by Matthew Soscia on Tue, 2009-12-29 08:09

My situation is that i converted my 401k (close to $70k) to Roth in late July. I don’t have much other income this year other than that. What can i do at this point if i want to make an estimated payment (to both Fed and State, say) before 2009 ends? (so i can deduct it this year, and also avoid an underpayment penalty).

I’ve never needed to pay estimated taxes before. From my quick research, it seems i have to have already been making quarterly payments? There is an annualized option for non-uniform incomes as well, but it also looks like installments are necessary there, too. Isn’t there any easy way to make a one-time payment now to go against my taxes when i file next April? Or are estimated payments so strict that you had to have set them up when you filed your taxes last year?

As far as safe harbors, my income was much higher in past years anyway, so not even sure had i done that at tax time last year that it would’ve been any help now anyway (as i would then be overpaying estimates bigtime).

Or would IRS do a waiver for such instances where it’s one big conversion all at once (not really planned that far ahead of time) and whereas you are not actually taking out any funds in the process either?



Submitted by Alan Spross on Tue, 2009-12-29 18:37

I am not aware of any track record of IRS waivers on conversion underpayment penalties.

The clock has now expired on your chances of addressing this through withholding sources, if you had any. Withholding is considered paid equally througout the year, so a large December withholding would be deemed spread over all 4 quarters. Conversely, the rules for estimates require that your payments be made equally unless you use the difficult annualized income installment method that is tedious at best. That would prevent underpayment charges from starting back in the first quarter since your conversion was in the 3rd quarter.

You can pay your 4th quarter estimate early so that you qualify for a tax deduction on the state form, but a full payment now does not mean that the IRS cannot assess an underpayment penalty due to your payment being back loaded in the last quarter. Whether they actually will remains to be seen, but any charges would be measured against your 90% of current year safe harbor amount since you indicated your income is down even with the conversion.

Note that if you overpay your state income tax, the refund will have to be reported as income in 2010 if you deducted it in 2009.

Submitted by Bruce Steiner on Tue, 2009-12-29 22:38

Section 6654(e)(3)(A) allows the IRS to waive the penalty if by reason of an unusual circumstance the imposition of the penalty would be against equity or good conscience.

Section 6654(e)(3)(B) allows the IRS to waive the penalty for reasonable cause if the taxpayer retired after age 62, in the year for which estimated payments were required, or in the previous year.

The penalty for underpayment of estimated tax is equal to the interest on underpayments of tax, and is based upon prevailing interest rates. With interest rates relatively low (4% from 4/1/09 through 3/31/10), the penalty may not be that great.

Bruce Steiner, attorney
NYC
also admitted in NJ and FL

Submitted by Alan Spross on Tue, 2009-12-29 23:04

Bruce,
The “retirement exception” you cited brings back a rather unpleasant memory. In 2007 my wife retired via layoff after age 62 due to slumping RE escrow operations, we did a conversion in December and I immediately paid a 4th Q estimate that in combination with other sources exceeded the tax liability for the year. The IRS billed an underpayment penalty.

I then referenced this provision in my response and provided evidence of the Cobra notice, birth Cert, and also there was no further W2, no UC income, or SE income for her in the subsequent periods. But the IRS refused to waive the penalty since they did not deem a layoff as constituting a retirement even when it obviously morphed into a permanent retirement. In other words, they deem “retirement” to be limited to a fully voluntary act. There was no severance paid and I doubt it that would have been material.

I completed a 2210 AI and the penalty was reduced to a paltry $19, but the IRS interpretation of “retirement” I thought was unduly restrictive.

Submitted by Matthew Soscia on Wed, 2009-12-30 07:30

thx for your responses. given the strictness of the irs, i’m not counting on getting a waiver.

i don’t have any withholding sources that i could’ve adjusted this year, no.

i plan to pay one-time estimates now (by 12/31) and hope to avoid any underpayment penalties. i will fill out the annualized form when i do my taxes. in the meantime, i’m making a rough guess and sending those in, just the check and form to each fed and state. it seems that’s all i need to do right now. and i also know more about the safe harbors now as well… yes the 90% one will be the one applicable to me later on.

now my big question, which i can’t seem to find an answer to anywhere, is: what date do they use for payment made?… is it postmarked date? else i would never make it in time to deduct the state payment for 2009. i did look into EFTPS, but there is 15-day delay in setting that up!

Submitted by mk foss on Wed, 2009-12-30 18:52

You get credit for your tax payments on the postmark date. The tax programs tend to assume that every payment made after Sep. 15 is made on Jan 15 of the next year, so you will need to override the date to minimize penalties. Also its very important to postmark your state tax payment by tomorrow so you can deduct that tax in determining your 2009 federal tax.

Good luck.

Submitted by Matthew Soscia on Wed, 2009-12-30 20:47

Yes, mgtf4cpa, that is exactly what i plan to do. how do i override the date, though? and do i need to purchase a certificate of mailing when sending, or better yet send certified mail for proof? thx, ms9

Submitted by mk foss on Thu, 2009-12-31 01:58

Usually its not an issue – the IRS is supposed to save postmarks but I suspect that everything that comes in around a deadline is treated as timely.

When you do your tax return, if you’re doing it by computer or hiring a preparer be sure to enter the dates of the payments that overrides the automatic features; it’s easy really.

Good luck

Submitted by Matthew Soscia on Thu, 2009-12-31 05:13

Ok, good. And I hope my State is as good as the Fed here, too. That is the more important one.

I do my taxes myself of course ;). Ok, will look for that at tax time.

Anyway, I already mailed them both today, and I wrote in to put the postmarked date, over 1/15/10.

Add new comment

Log in or register to post comments