Estimated tax payments required for Roth conversions & s/t stock gains?

Submitted by Michael Kandrac on Sun, 2013-12-01 17:28

I want to confirm my interpretation of IRS rules on the date by which Federal Income taxes need to be paid for 2013 Roth Conversions and short term stock profits. In 2013 I am having significant taxable income increases of $105,000 from short term stock market realized profits and $100,000 on an IRA conversion in October to a Roth IRA. Totals will be ~$262,000 taxable income with $9,261 withheld. In 2012, we had taxable income $57,000, withheld $9,261 and taxes paid $7,624. I know the IRS “safe harbor” rule that estimated tax payments are not required if the 2013 withholding is 100-110% of the 2012 tax paid, in my case $7624 * 120% = $9148 which indicates that I am “safe” and not required to make estimated payments for 2013. The way I see it then is that my significantly higher 2013 tax liability ~$62,000 can be paid in lump sum on 4-15-2014. I need confirmation that I have it right and will not be subject to tax underpayment interest and penalties. At the heart of my question is are estimated tax payments for these 2 types of taxable incomes required? Thank you.



Submitted by Alan - IRA critic on Sun, 2013-12-01 19:23

  • The safe harbor that applies to you is 100% of your 2012 tax liability of 7,624. You have withheld more than that (9,261) so you meet the safe harbor based on your 2012 tax liability. There should be no underpayment penalty, although you will owe plenty in April. Remember that you can recharacterize all or part of the conversion if you wish to.
  • While any penalty is very unlikely as noted above, there is a slight chance that in the event of any audit, the IRS could try to levy a penalty based on separate quarters, since your withholding was probably done in the latter quarters and nothing was paid in for the early quarters. If that were to happen, they you could file a 2210 using the annualized income installment method that would show that your income was also realized in those later quarters and this should eliminate any penalty. All of this is very unlikely, but wanted to mention the possibility.

 



Submitted by Michael Kandrac on Mon, 2013-12-02 14:19

Thank you for the confirmation.   The old adage applied to me in that I was afraid of not knowing what I don’t know and it seemed reasonable to me that estimated payments would be due when the conversion to Roth was made and not by the following April 15 which could be 15.5 months later.    This seems like a strong argument to convert to a Roth as soon as possible – even Jan 1 since the tax won’t be due until 15,5 months later.   I am prepared to pay the very high tax liability on April 15, 2014 for future tax free growth & accumulation.   Again thanks



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