joetaxpayer wrote:
- quote -

This is not an unusual situation so let me outline strategy:

1. 2005 income tax adequately paid by withholding.
2. 2006 has large LTCGs in 4th quarter.
Solution: Be sure withholding at least equals 2005 taxes.
If it's too late to overwithhold, make an installment on Jan
15 to make up the difference. File form 2210 AI to prove
why the "make-up" payment wasn't due sooner or in 4 equal
installments.

3. 2007 Lost job and no (or very little) withholding
available, and don't want to pay 1/4 of 2006 taxes every
quarter due to low 2007 income, afraid to estimate full year
tax for 2007 due to uncertainties of 1099 work and probable
LTCG in 4th quarter.
Solution: Use the 2210 AI Method to compute your minimum
quarterly installments. See Publication 505, or get a 2210
AI tax calculator and DO NOT estimate 2007 full year income
or 2007 taxes. Let the AI form or calculator use your actual
quarterely income and deductions. For the 4th quarter,
consider using withholding from a MRD, or ROTH conversion
and make up the shortfall with your own funds.

4. 2008 getting better income.
Solution: Pay 1/4 of 2007 tax each quarter, or use the 2210
AI Method and possibly pay less per quarter but DO NOT use
an estimate of the current year's income or tax even if you
think it will be lower.

5. Do not use last year's tax program to caculate the 2210
AI because it uses your actual full prior year's tax or
requires you to estimate your current year's income or tax,
and does not have current years' tax rates or rules.

6. Do not use a tax programs' current year's tax
"estimater" as they do not Annualize and often don't compute
the AMT or phase-outs or automatic credits.

MF

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"Phil Marti" <prm20871[at]verizon.net> wrote

- quote -

Right, sorry, I was not clear about what I anticipate.
Namely, I will convert the remaining, roughly half of my
Traditional IRA in 2007, again boosting my usual, reported
income by a lot. As it happens, the total liabilities for
2006 and 2007 will be very close. But since my 2006
liability is so high, then I must pay more in estimated
taxes for 2007, or face a much stiffer penalty. I can do
that.

I am just happy I have the spare dough to pay the extra
taxes and finish converting my Traditional IRA to my Roth.
For my circumstances, and my expectations about future tax
rates, this seems to be a good decision (knock on wood that
tax law for Roths does not change).

Anyway, what you say confirms I have a handle on what's
expected of me for taxes in 2006 and 2007.

Thanks again.

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"joetaxpayer" <joetaxpayer[at]nospam.com> wrote:

- quote -

I'm not clear what this means, so if the response doesn't
make sense, please elaborate.

- quote -

Correct. If you need some extra withholding, you can file
an amended W-4 with your employer to have a specific
additional amount withheld there. All withholding lumps
together when you file your return and is treated, for ES
penalty purposes, as having been withheld equally over the
year.

This case where you have an unusual one-time spike in income
is an example of when it's a good idea to base this year's
estimate on last year's tax. As long as you have 2006
withholding credits equal to your 2005 total tax (see
Publication 505 for the "buts" that don't apply to most
people), there will be no penalty for 2006 even if you have
to cut a check for $1 gabillion 4/15/2007.

--
Phil Marti
Clarksburg, MD

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"Elle" <honda.lioness[at]nospam.earthlink.net> wrote:

- quote -

No, the IRS expects you to meet your 2007 estimated tax
obligation. One way you can do that is by basing your 2007
payments on your 2006 liability. But if you had a big spike
in income in 2006 that you knew would not be repeated in
2007, you are not required to base 2007 payments on 2006
liability to avoid a penalty. Rather, you can base your
2007 payments on your anticipated (or actual) 2007 income.

In short, if your income is going up you're probably better
off basing this year's ES payments on last year's tax. If
it's going down, you're better off ignoring last year.

--
Phil Marti
Clarksburg, MD

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"ed" <edcosoft[at]sbcglobal.net> wrote

- quote -

My 2005 tax liability was very low. Even using 8%, my Form
2210 preliminary calculations indicate I will owe a penalty
of under $10. I went through the preliminary Form 2210
calculations precisely to see if I should pay something now
(or, like you say, by mid-January, 2007), rather than wait
until April 15, 2007.

Thanks for explaining what Bill meant. I already did the
conversion, without withholding, but I will make more
inquiries of the brokerage I use for my IRA, so I know "next
time." The brokerage offered to withhold; I just thought
they meant 'pay the taxes out of my IRA funds.' Obviously I
did not know exactly what they may have been getting at.

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"Phil Marti" <prm20871[at]verizon.net> wrote

- quote -


- quote -

My 2005 tax liability was small, so from my study of Form
2210, this is why my 2006 penalty is so small. But now that
my 2006 tax liability is way higher because of the
conversion, for 2007 the IRS expects me to pay more in
estimated taxes or, in the alternative, end up paying a
bigger penalty for tax year 2007. Financially and paperwork
speaking, I can handle the 2007 estimated taxes without a
problem.

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

Phil Marti wrote:

- quote -

As this might apply to anyone with a large cap gain or any
unexpected, undertaxed, income during the year, can you
elaborate on you reply? I shall have a gain in Q4, and was
just hitting penalty land on my tax withheld. This info
would be useful. Brokers can withhold tax on an IRA
withdrawal/conversion, but they don't seem to be able to
hold for a large stock sale.

JOE

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Elle wrote:

- quote -

To avoid the penalty entirely, and by the way it is now 8%
(which figures out to about $50 if your tax last year was
$1,000 and you don't poay any installments nor the tax until
next April), you should have slightly more than the amount
of your last year's tax withheld from the conversion, and
then make up that difference with you own funds so you don't
have a withdrawal penalty.

The only other way to avoid the penalty would be to pay a
1040-ES installment on January 15, 2007 (no need to pay it
earlier because the conversion is iin the last quarter) in
the amount of your 2005 tax and then use the 2210 AI with
your final return. The AI should be a snap for you,
particularly if you entered your interest and dividend
income in Money or Quicken that will pull up "Income to
date" reports for each "tax quarter".

All the tax programs have a 2210 AI option along with your
final return if you owe an underpayment penalty. They do
all the calculating for you and print the forms. You don't
need to calculate the 2210 now. Although you can get a 2210
AI tax calculator on the web for $18, you don't need it if
you follow the above advice.

For 2007, you can avoid having to make installments equal to
1/4 of your 2006 tax by having the amount of your 2006 tax
withheld from your conversion and make up the difference
personally.

ed

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"Elle" <honda.lioness[at]nospam.earthlink.net> wrote:

- quote -

Your 2006 tax affects 2007 ES payments only if you choose to
base your 2007 estimates on 2006 liability. There are other
ways of avoiding the underpayment penalty.

--
Phil Marti
Clarksburg, MD

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Phil, Mark, and Bill:

Thanks for the input. I am on my way to becoming a Form 2210
(plus its schedule AI, like you said, Mark) maven. :-) I am
also now aware that my 2006 taxes are going to affect my
estimated taxes for 2007, when I hope to finish converting
all my Traditional IRA to my Roth.

Bill, withhold from the conversion amount? Am I misreading
you? That pretty much eliminates the advantage of doing a
conversion. Anyway, as I mentioned subsequently, I will be
paying the tax bill from non-IRA sources.

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Sorry to respond to my own post. While waiting for my
submission to post here, I slogged through a draft of Form
2210 (admittedly a chore) and found the penalty is tiny.
Plus, given current money market interest rates and assuming
the 2006 Form 2210 penalty percentages do not change much
from 2005, it seems it is not even worth it to pay
estimated tax for 2006. Barring contradictory input, I plan
to convert just enough (from Trad. to Roth IRA) to keep me
out of the next tax bracket, and then pay the penalty with
my regular taxes, submitting Form 2210.

The last few years have been good to me, and I have the
"spare change" to easily pay the extra taxes on the
conversion. Also, here in my late 40s, I do indeed
anticipate being in a higher tax rate when I am 59.5 or so.
I am hoping to convert the remainder of my Trad. IRA to my
Roth in 2007.

TIA for further input.

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honda.lioness[at]nospam.earthlink.net (Elle) posted:

- quote -

Form 2210 will come into play if your taxes w/h or est'd
payments don't come up to snuff. I would suggest you either
"fly below the penalty threshhold, or go ahead and file a
1040-ES right now, using "Payment #3" coupon for mailing by
Sep 15, and pay enough to pull yourself well south of the
penalty area.

2210 calculations take into consideration when income was
received, and accrues payments due through the year, so one
payment by Jan 15 of 2007 would likely still result in a
penalty.

Perhaps a better alternative would be to request w/h from
your IRA trustee from the conversion amount. I believe you
can specify a particular amount. That will give you credit
against taxes due, and since it is w/h, it is automatically
distributed proportionately, over the full tax year (as I
understand it).

Bill

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Elle wrote:

- quote -

Yes, you will have to use Form 2210 plus schedule AI
(annualized income) method to show you do not owe a penalty.
Using tax software, it's moderately tedious, you
practically end up doing four quarterly tax returns (income,
adjustments, deductions, tax, and payments for each
quarter). But at least the calendar calculations are
automatic.

The "under $1,000" safe harbor only uses withholding, not
estimated taxes, in the calculation. You probably won't
want any withholding from your conversion to avoid the early
distribution penalty. Maybe you can increase your
withholding on some other income?

You can't use the short method on Form 2210 because you
won't have made four equal quarterly estimated tax payments.

Pub 505 has all the details.

-Mark Bole

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"Elle" <honda.lioness[at]nospam.earthlink.net> wrote:

- quote -

Yes.

--
Phil Marti
Clarksburg, MD

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

I want to convert some of what's in my Traditional IRA to my
Roth IRA for tax year 2006, effective say, October 15. I
want to convert just enough to keep me out of the next tax
bracket.

I have no withholding done during the year. Nor have I paid
estimated taxes, since my annual federal taxes owed is
typically under $1000. I live off mega qualified dividends
and interest.

If the conversion takes me over $1000 of taxes owed, am I
stuck completing Form 2210 to avoid a tax penalty? Or can I
just send in money using Form 1040-ES by January 15, 2007,
that will get me under $1000 owed by April 15?

I realize another option is to convert just enough to avoid
any penalty for 2006.

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >