Qualified account

Submitted by Eric Gilbert on Wed, 2015-09-30 16:45

I’m a bit out of my element here so I appreciate the help. My brother died in January of this year. He was not married (divorced) and had no children. He had a 401k plan that will be divided among his siblings (myself and my two sisters). As a co-administrator I have already received the proceeds and am ready to distribute to my sisters. FYI, two of us live in Texas and one sister lives in Indiana. I believe that because of this inheritance, we each need to pay estimated taxes prior to 12/31/15, is that correct? If so, can we pay it anytime prior to the above date via irs.gov? And, if that’s possible, is there a calculator that will help us to determine what we owe individually? The plan sponsor withheld 10% but other than the taxes we owe individually…will any other taxes be due? Thanks for your help! Eric



Submitted by Alan - IRA critic on Wed, 2015-09-30 22:25

The last two installment due date for estimated taxes are 9/15 and 1/15/2016, but even if the estimated taxes are paid 50% now and 50% by 1/15, there could still be an underpayment penalty without filing the 2210 AI which is complex but will recognize the income coming late in the year. To avoid that complex form, if any of you has a withholding source such as salary to increase withholding now through year end, the shortfall might be made up and withholding is treated as if paid througout the year rather than when it is actually collected. As far as how much more to withhold, that is a function of each person’s total income and deductions and what taxes have already been paid in so far. To determine what the shortfall might be, here is a simple tax program  https://turbotax.intuit.com/tax-tools/calculators/taxcaster/  that each person could enter their income and deductions in to help determine how much more needs to be withheld or paid as estimates. A beneficiary might have a tax situation too complex for this to work and might have to consult a tax professional. On the other hand, the late interest rate is only 3% so it may not be worth worrying too much about. If the distributions are large, an accountant might be able to use a fiscal year for the estate to spread some of the income into 2016. Sounds like the estate was the actual plan beneficiary.

Submitted by Ben Meyer on Wed, 2015-09-30 23:15

  • Penalty can also be avoided for underwithholding by getting into the “safe harbor”.  Regardless of the taxable income for 2015, there is no penalty for federal underwithholding if the total withholding and estimated tax payments for year 2015 are at least equal to 100% of the actual tax for year 2014,  if your 2014 adjusted gross income was $150,000 or less ($75,000 if married filing separately for 2015).  If over that threshold, the safe harbor is reached if the withholding and estimated payments are at least 110% of your 2014 tax.  The safe harbor also requires that your 2014 return covers a full 12 months.  Using the safe harbor may be advantageous if your anticipated 2015 income will be significantly greater than your 2014 income due ot the 401(k) inheritance.
  • You should also look into state income taxes for the applicable states to see if any estimated payments may be required, or if a similar safe harbor applies.  This may not be a concern, as state tax rates are usually much lower than federal.

    

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