Retired for just over 18 months. Elected to have nothing withheld from my social security payments, 401k withdrawls or annuity payments. For the 2013 taxes, I have just paid $3200 in federal income taxes, including a $52.00 penalty. Both wife and I are over 65 and our total income is $67,000.00 (43k s.s. and 24k annuity & small pension), with nothing withheld except for medicare insurances.
Also, was informed that I must start paying quarterly income taxes or face heavier penalties and interest for what I should have paid.
What would happen if I elected to not pay quarterly for 2014 income, but paid at the end of the year (actually early 2015) when I file? What would recommend as a best practice?
Terry Says: You can get away with not filing quarterly the first year you retire, but there are severe penalties if you haven’t paid in at least 90 percent of the required tax. Here’s what the IRS says about those who are NOT required to file quarterly:
You do not have to pay estimated tax for the current year if you meet all three of the following conditions.
- You had no tax liability for the prior year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12 month period
You had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.
So, work with your accountant to determine how much you will earn this coming year. You can make the payments online from your checking account to the government (and state) webfile sites. Or you can have your accountant give you a “coupon” titled 1040-ES — with the amounts necessary, and send in a check. These penalties apply even if you have the cash and plan to pay when you file your return! See more info I have pasted below from the IRS website about the timing and penalties:
When To Pay Estimated Taxes
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return, see underpayment of tax below for more information.
Using the EFTPS system is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using Electronic Federal Tax Payment System (EFTPS). If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.
Underpayment of Estimated Tax
If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505 Tax Withholding and Estimated Tax, for additional information.