No. of Recommendations: 7
I'm hoping this year I did a better job of estimating taxes because last year I missed it big time and had penalties. - Rich
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I have been doing aggressive Roth Conversions for 10+ years which as you know generates taxable income. On top of that my other income can swing plus or minus 20-30% each year based on investment earnings in taxable accounts, SS kicking in, etc. On top of all that, the feds adjust the brackets, the standard deduction, SS payments, etc each year. It is very difficult to make sufficiently accurate estimates of all the factors necessary to make estimated tax payments that bring you to within 2 or 3% of your target.
To manage all this, the "system" I ultimately arrived at is this. I use the safe havens defined in the tax code to avoid exposure to penalties. One of the safe harbors is: no penalty if your estimated tax payments for the current year total at least what your actual tax due was for last year, a number you know. Note, your total tax payment has to be 110% of last year if your current year taxable income is high enough.
So, using 2023/24 as example, to come up with estimated tax payments for 2024, I take 2023 tax due, multiply by 110%, then subtract off any 2023 over payment that I rolled forward to 2024. Whatever that number is, divide by 4 and viola, there is your quarterly payment to use throughout 2024. If your income jumps up or the tax tables change, you still will owe some taxes at the end of 2024. There is no avoiding the extra tax itself but you won't be paying any penalties.
Anyway, congrats on retirement.
Sorry for the long post, but I will must add briefly, if you haven't studied the Medicare IRMAA penalty and its potential impact on Roth conversion amounts, you should. I was oblivious for too long and started Roth conversions too late to avoid this penalty. It was an unforced error on my part and it hurts. Lesson learned.
